The supply chain of the future is (slowly) coming online
Pandemic-driven disruptions have left the global supply chain in a deep crisis, but new technologies and approaches could help avert the next one.
Why it matters: The inability to get goods made and shipped is raising prices and dragging down the global economy.
- More automation will help improve efficiency eventually, but a more sustainable supply chain may require companies to pivot from "just in time" to "just in case."
Driving the news: U.S. GDP growth slowed to 2% in Q3 2021, a lower-than-expected number economists attributed to the Delta variant and supply chain problems.
- According to the Freightos Index, the median cost of shipping a standard metal container from China to the West Coast hit $20,586 in October — almost double what it cost in July, which was already twice what it cost in January and 700% higher than the cost a year ago.
Be smart: While the idea of a supply chain crisis can make it sound as if the global economy is experiencing a shipping deficit of some sort, in fact more goods than usual are flowing.
- That's the problem: the pandemic led consumers to shift from spending money on services to spending on goods — well beyond what the global supply chain could handle — while COVID-related disruptions damaged the ability of factories to get the components and labor they needed to make all that stuff.
- Add to that the years of companies prioritizing "just in time" manufacturing and shipping, with little excess inventory on hand to cushion disruptions, and you have a supply chain crisis.
- "What's important is not so much the 60 or 80 container ships lined up off L.A. — that will eventually get resolved," says Hamid Moghadam, CEO of San Francisco-based Prologis, the largest industrial real estate company in the world. "It's a fundamental issue of capacity to carry more inventory in the system so that you don't have a problem."
The catch: There's a reason companies embraced "just in time" rather than "just in case" strategies — a dollar spent on banked inventory is a dollar that can't be invested elsewhere. Many goods, like fashion or high technology products, will also quickly lose value over time if stored in a warehouse as a hedge against logistics crises.
- Moghadam notes that one solution could be to build more warehouses closer to consumers — which would benefit his company as a leading logistics landlord — but that often meets resistance with the public.
- "People want their stuff immediately, but they don't want to deal with the traffic and the congestion," he says.
What's next: Since consumers are unlikely to abandon their desire for rapid shipping — especially since the pandemic led to a boom in e-commerce — one longer-term solution is to make the supply chain more efficient through automation and other technological advances.
- The Colorado-based startup Outrider is automating operations in yards within distribution facilities, where goods move from trucks and other transport lines to warehouses. That can help reduce costs and improve safety, notes Outrider CEO and founder Andrew Smith.
- San Diego-based Platform Science develops smart fleet management technology that keeps trucks on the road connected, strengthening "actual links in the supply chain," says Jack Kennedy, the company's CEO and co-founder.
- As 3D printing matures, it will allow companies to produce necessary components where and when they're needed, sidestepping both "just in time" and "just in case" for "make on demand."
By the numbers: Investors are paying attention — a record $45.1 billion has been raised by industrial startups so far this year according to Pitchbook, compared to $34 billion for all of 2020.
- Yes, but: Those investors need to understand it can be harder and take longer to create change in sectors that deal in "atoms rather than bytes," says Will O'Donnell, managing partner of Prologis Ventures, the company's VC arm.
The bottom line: The pandemic-related supply chain crunch won't always be with us, but further crises will recur unless we can fundamentally change how we get things from A to B.