Ever since the world has been hit by the COVID-19 pandemic, people have been reintroduced to certain ancient concepts and practices, such as social distancing, which have not been followed on such a large scale for over a century. Inevitably, this calls for quick adaptation to the rapidly changing conditions in every sector brought about by COVID-19.
While social distancing and quarantine are not new concepts, they have not been practiced in ages. They were, however, readily used in the old days against unidentified diseases or plagues and were considered some of the most efficient and effective ways to prevent the transmission of communicable diseases. With considerable advancement in medical technology over the last few decades, such measures almost seemed redundant and dispensable in this day and age. Surely, the world was not prepared to be hit by a global biological catastrophe.
Despite the devastating effects of our preventive measures on the economic structure, most countries are adhering to strict safety guidelines in an attempt to halt the spread of the disease. This includes shutting down all kinds of public transport and spaces, closing schools and encouraging people to stay indoors at all costs.
What effect will this have on our logistics industry?
In 1980, logistics costs were estimated at 16% of GDP. Currently, it has approximated to 9%. These savings are a consequence of lean or just-in-time (JIT) supply chains. The logistics industry has greatly reduced costs by shortening the order-to-cash cycle.
On the other hand, this has eventually led to greater dependence on a global network but one cannot simply overlook the shortcomings of the global supply chain that have been exposed in the COVD-19 pandemic. In a world where global sourcing has become a popular business strategy and production facilities are mostly situated at distant locations, the logistics industry has become increasingly vulnerable to such unexpected events.
Coronavirus has hit our system really hard, disrupting manufacturing, distribution and logistics worldwide. We now face an uncertain future.
So, how will logistics adapt to these unforeseen circumstances?
It is now imperative for businesses to hold safety stocks and ensure continuity of supply in these uncertain times, shifting from a ‘just-in-time’ to a ‘just-in-case’ system. While this additional inventory or buffer stock will increase the costs for storage and security of the stockpile, it is our best solution to smooth out price fluctuations and ensure steady supply of commodities for consumers.
In view of the current situation, global outsourcing is likely to be replaced by near-sourcing. This could very well mean that multinational corporations would try to move production back to their home country.
What does this mean for the extensive global supply chain networks?
These too will move from a more complex to a more simplified system. Organizations are now looking to simplify their business models by narrowing their networks in order to reduce dependency.
Consequently, social distancing may lead to shrinking of the supply chain.