Supply Chains: Broken Beyond Repair?

Written by Nicholas Little, Director Railway Education, Center for Railway Research and Education, Michigan State University Eli Broad College of Business
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Never before in our recent memory has so much focus been put on “supply chains.” The popular press has added the term to the language of the everyday person. We hear things like: “I went to the store today and the items I wanted were out of stock. Must be a supply chain problem.” Railroads are part of the supply chain, but few people realize or understand it.

Supply chains are a critical component of life today. I’d argue this is not a new phenomenon. One great piece of advice my dad gave me (possibly the only one I actually listened to) when planning my career was “People will always need stuff!” He worked in army logistics. He’d seen how important it was to keep the front line supplied with munitions, but also with food, coffee and tobacco!

Are today’s supply chains broken? To answer this question, I’ll point out that supply chain people (those in procurement, operations and logistics including transportation) have been studiously working hard behind the scenes fixing supply chains since long before the modern term was invented (c. 1973 at MSU and other collaborating universities globally). 

When all goes well, nobody notices. Yet there’s always been fervent activity to get the right stuff to the right place in the right quantity at the right time and for the right cost. Supply chain people rarely were praised publicly because “It’s their job.”

The same is true for railroads the world over. Passengers don’t complain when the train is on time (except when it is overcrowded, too hot or too cold etc.). Shippers and freight customers likewise, unless their product arrived damaged.

Supply chain management developed scientific methods to remove guesswork and elements of chance from the equation. Just-in-time (JIT) became a common descriptor enabling manufacturing to minimize inventory. Safety stocks were reduced to improve top- and bottom-line financial performance. Quality control was improved by adopting Six Sigma principles. Lean manufacturing enabled efficiency improvements and better asset utilization.

So, what has changed and why?

First, the fat has been squeezed out of supply chains. Safety stocks are minimized. JIT evolved to precisely on-time. Early deliveries were as bad as late ones. 

Second, data enabled a lot more visibility within an operation and then along the supply chain. But visibility has turned out to be not enough. Data for its own sake is worthless. It must be used for management and improvement. Numbers must have meaning. We are now beginning to recognize that there’s a big difference between ‘visibility’ and ‘transparency’. 

Sharing the data between supply chain partners (some of which are internal to your organization) is good, but interpretation of the data can differ if there is no common strategic direction. Interpreting the data in the context of your customer’s and consumers’ strategic value proposition is critical. Making that happen delivers real transparency.

Third, we squeezed the assets until there was little if any, redundancy in operations or equipment, or even infrastructure. That meant we had to seek resilience through risk management. We focused on the ‘likely to happen’ events that we knew would have big impacts. We didn’t focus on the unlikely events that could have even bigger impacts.

And then came COVID-19. The pandemic. An abrupt and massive disruptive change in what people did, where and how they did it, what they purchased and what their priorities were. This amounted to a change in culture and the nature of many businesses.

Consider the vast difference in fortunes, revenue and profitability of commuter railroads vs. freight. The pandemic forced people to immediately reduce their need to commute into our cities as many worked from home. Families reduced spend on some categories (eating out or entertainment in theaters) yet increased demand for other sectors (toilet tissue, spaghetti sauce, home office furniture). Clothing demand changed, leaving retailers holding the wrong stock. 

Freight rail considered itself doing better than it could have been, despite the drop in automotive parts and finished vehicles. But then, some deeper, less expected issues began to surface. These became front-page news when the automotive industry resumed operations but found that a “perfect storm” had reduced the availability of computer chips, essential to the functioning of modern automobiles.

Factories couldn’t operate at full capacity to meet demand as it picked up. In many parts of the world, large numbers of factories were closed due to high infection rates among their workforce. That also affected some raw material supplies. This set off reactions throughout many disparate supply chains across the globe.

Here’s one quick story:

A retailer, predicting sales volumes for Spring and early Summer 2020, stocked its warehouses accordingly. It supplied to retail stores ready for the demand. Customers stayed home, went online and ordered different items from competitors. That phenomenon was quickly recognized, so the company set up a new warehouse designed to cope with e-commerce demands (fast response, home delivery, many low-value transactions, and returns, to name a few).

Total demand for that company fell. It had unsold stock in the warehouse, capital tied-up in goods it could not sell. The company reacted in two ways. First, it decided that e-commerce was to be its future, so it changed the distribution network from three large distribution centers carefully situated to serve the whole county. It set up regional distribution centers and local fulfillment centers to provide the next-day service consumers now expected (thanks Amazon!).

This retailer pulled back unsold inventory from retail stores, but too late for that season’s sales. its realized that it had to be properly prepared for the future, and increased orders for the Fall of 2020. Much of that came from the Far East, yet space in factories was becoming scarce, slots on container ships was harder to find and more expensive, and containers themselves were in short supply.

This company was not alone. The problems were becoming endemic. Jump forward a few months, after many companies had incurred higher shipping costs by using air freight. We’re now in the 2021 Spring and Summer season. Warehouses are still full. Last year’s stock remains, and new 2021 stock is arriving. Where to put it? No space. It is left in the shipping container, on a chassis in the warehouse yard. Yes, demurrage is incurred, but what was the option? … What is the consequence?

A shortage of chassis at inland intermodal terminals (rail intermodal is much closer to the end consumer than traditional rail traffic types). Containers arrived from the ports or from transload centers have nowhere to go but into stacks in the terminal. At least one railroad converted tracks to container storage. Along comes the drayage driver to collect a specific container. It’s at the bottom of a three-high stack. That takes time and extra cost to move and load, even when there’s a chassis available. 

The inbound flow from the ports isn’t abating. The railroads managed that by parking trains en-route, thereby tying-up valuable well-car capacity and risking reduction in network fluidity due to trains parked in passing sidings or even on the main line.

The landing ports become even more congested, delaying the berthing and turnround of ships. That sustains the number of ships moored offshore awaiting berths, which reduces the overall container shipping lines’ capacity. Ports in the Far East start to turn away exports or defer them to other, later sailings due to lack of vessel space.

Factories producing the goods slow down their production, thereby reducing efficiency, increasing unit costs and lengthening order books.

Where does it stop? How can it be fixed? These are questions yet to be fully answered. Supply chains cannot simply stop because, as my dad said, people will always want stuff.

There are some ways forward. I mentioned visibility vs. transparency. The more we concentrate on transparency, the better our chances, because that helps us focus on strategic priorities. A great example of that being possible was in the early months of the pandemic, when firms and people shifted from normal business activities to making PPE and ventilators (3M and Ford spring to mind).

What can the railroads do? I’d strongly argue that we cannot afford to say that because transportation, especially freight, is “derived demand” as the economists label it, we can do nothing. My answer is to become heavily involved in your key retail customers’ supply chains. Do what you can to improve the customer experience. Become more involved in transloading, and demonstrate that value can achieved when service includes transportation between rail terminals and is supplemented by great relationships that effectively cover the end-to-end service required.

Think of it this simple way. The only person who ever puts real money into a supply chain is the end consumer. As a carrier, how do we add value for these end consumers? If a link in the supply chain cannot demonstrate how it does this, it shouldn’t be there.

Nick Little

Maybe our initial value add is to address how railroads really address the ES&G goals of our key customers and the impact on their consumers’ experience? To do this, we need to build strong relationships with the marketing people in those companies, not just their transportation managers. Learn what makes them tick, and what keeps them awake at night. Identify what they seek and find ways to demonstrate our advantage over trucking while fulfilling those needs with a great experience.

Nick Little is Director of Railway Education at Michigan State University Broad College of Business Center for Research and Education.