Until very recently, supply chain networks across the world have been engineered to operate on the shortest possible lead times and the lowest possible cost.
Black Swan events such as COVID-19 have underscored the vulnerability of these systems to business continuity and sustainability. PwC’s COVID-19 CFO Pulse Survey (Africa Findings) in May this year (the PwC COVID-19 survey) for instance, established that the main supply chain strategies for CFO’s post COVID-19 include developing alternate sourcing options (64% of respondents) and changing contractual terms (56% of respondents).
A lot has been written on the impact that COVID-19 will have on the way supply chains are structured both regionally and globally but let us consider for a moment what distribution centres and warehouses could look like in a post-COVID-19 world.
Higher stock levels
A noticeable trend is the fatter inventory carried by third party logistics providers and FMCG companies. The reason for this is two-fold: The classification of essential goods varies greatly. In some instances, washing powder may be classified as essential whilst dishwasher detergent is not, and suppliers have to be able to cater for the varying consumer demand accordingly. The second reason for higher inventory levels relates to the fact that companies simply do not know if or when a warehouse may temporarily shut down for deep cleaning due to the virus. This necessitates larger inventories in multiple locations to diversify risk.
An increased regional footprint
Supply chain networks have already started migrating to multi-level sourcing, which will further stimulate the need for regional warehouses and distribution centres. Considering the impact of industrial action and the effects that closure as a result of COVID-19 could have, super distribution centre models does not always make sense in the current environment. Transparency across the entire supply chain has become top of mind, especially as companies’ risk mitigation and business continuity measures increasingly depend on the ability to access a wider footprint of distribution centres and warehouses carrying higher stock levels.
The PwC COVID-19 survey concurs that CFO’s in Africa are less likely than their global peers to consider cancelling or deferring investments in operations, IR, R&D and customer experience. Similarly, only 15% of African CFOs are considering deferring or cancelling investments in digital transformation. Even fewer are likely to cut investments in customer experience (6%).
The online shopping tsunami and the rise of click-and-collect
Statistics from Europe supports a surge in online purchases irrespective of the virus, resulting in a much bigger impact on high street shopping than even during the 2007 – 2008 Global Financial Crisis. This trend is also prevalent in South Africa. According to a recent article on MyBroadband, South African food retailers have seen a 700% increase in web traffic volumes. The knock-on effect of this is higher demand for last mile distribution centres.
An interesting trend is the growth of click-and-collect options. Considering this demand, better software will increasingly support more efficient click-and-collect protocols. It is expected that this model will increasingly gain popularity across Africa, where consumers are expected to leapfrog retail trends to online, as to the early adoption of cellphone banking. In fact, the online banking platforms could be a catalyst for a quicker migration to online shopping, provided that retailers can solve the problem of traffic congestion and address location. Even with an address, finding an exact location can be challenging – last mile distribution centres that allow for click-and-collect options will likely have an advantage in this regard.
Flexible space
We have noted a strong demand for short-term space as third party logistics providers and FMCG companies seek to establish a more flexible and adaptable distribution network. Most landlords have been filling vacancies through flexible short-term options without any tenant installations. Considering the strong interest in lease renewals on the back of an expected upsurge in demand post COVID-19 we anticipate flexible leasing options to become increasingly more commonplace and sophisticated, as trends in Europe suggest.
The PwC COVID-19 survey notes that CFOs’ approach to supply chains reflect their realisation that the stabilisation phase will be long and sometimes difficult. CFOs know that operationalising the “new normal” will come with challenges that result from the crisis, as well as from pre-crisis factors. PwC points to findings in an earlier report that only 28% of supply chain decision-makers surveyed had implemented solutions to increase supply chain transparency to achieve visibility across the entire supply chain, from materials to customers and back.
Although it remains too early to predict the long-term impact on COVID-19, what we do know is that stabilising the supply chain remains critical to ongoing business continuity. As FMCG companies and third party logistics providers adapt their business strategy with increased focus on transparency, e-commerce, local sourcing and regional distribution, logistics centres and warehouses will play an increasingly significant role in effecting this.
-By Mark Truscott, Head of Leasing
