As supply chain companies shift gears to accommodate the worldwide challenges of the pandemic, one of the most affected areas is turning out to be the shift from normal delivery patterns to an increase in residential deliveries. While each company is different, the increase in the daily volume has risen around 8% to 10% on average over last year.
For instance, UPS has increased 8.5% in the first quarter. This shift is affecting many aspects of a company, but profitability is strongly impacted from the shift in volume from commercial to residential deliveries. This will undoubtedly initiate price increases if the current situation continues.
It is becoming apparent that this mega trend shift to a more robust remote workforce is part of the new normal. Home orders are much more commonplace now and for some companies the levels are approaching 60% to 70%. The shift has been quick and unprecedented, continuing to leave many companies in the supply chain and freight carrier market segments struggling to deal with it effectively.
This will likely cause lower cost effectiveness for each delivery because the shipments are smaller and take more time, and in addition deliveries are more spread out. Miles driven and the number of stops necessary to maintain customer responsiveness are significantly impacted, decreasing revenue due to these factors.
In addition to these influencers, the change in regulations and security concerns add more cost increases to the process. Containers are taking longer in customs for international shipments, and an increase in container examinations and demurrage add to delays and costs.
All of these have a direct effect on internal operations as well. Demands on freight capacity are significantly increasing caused by delays, capacity factors, and the delivery regions affected by the pandemic. Demand also appears to be increasing in variability and uncertainty almost daily, as news updates are released.
Strain On Internal Operations
The pressure of the new economic reality doesn’t stop there. While external pressures are affecting the way supply chain companies are responding, those factors also influence the way they must now operate internally. Several specific areas are feeling the impact on the work forces, some of it due to the volatility and much due to the strain on the resources. For instance, during the pandemic, we have spoken to the CFOs and COOs of several of our clients to get their take on the situation from their viewpoint.
Some of the key points they are making about how they are being affected include:
- The increase in demand and the change in operation patterns is causing an increase in the number of labor hours needed to continue solid customer responsiveness, inventory management and replenishment, and problem resolution that comes with the territory.
- Errors in shipping, scheduling, allocations, and returns are adding to the already present chaos and stress, negatively impacting profitability and in many cases, market share.
- To that note, customers, both B2C and B2B, are becoming more demanding, increasing customer churn rate and eroding loyalty that they have experienced for years with some customers. Part of the irritation for their customers is their difficulty in responding in a timely manner with shipment receipts. The late or incorrect shipments have an effect on their operations as well, reducing profitability down the chain.
- These factors are making it very difficult to plan, budget and get accurate and meaningful financial statements. They are feeling that the targets are constantly moving, and that budgeting is becoming useless until data can be accurate enough to provide a good data basis for them.
- Several report strains on delivery schedules and tracking deliveries causing customer uneasiness and concern. This in turn negatively impacts the quality of delivery scheduling.
- Changes and reduction in quality communication due in part to the remote workforce requirement and also in part because of older legacy systems
Strong Ripple Effects on supply chain ERP systems
The concept of a supply chain is that every link is connected to another link(s), and it is true that the afore mentioned challenges are also affecting their ERP systems, which support the business unit it a technological way. As we’ll see in the next section, there are things that can be done to improve the circumstances and disruption on the internal systems
Below are some of the issues that are cropping up as companies try to compete and meet market demand needs:
Higher volume of traffic to meet demand:
- Because a higher volume of traffic is required to meet demand, fluctuations, and deliveries, the volume of transaction traffic on ERP systems has increased by even a greater extent.
- This slows down transaction processing, increases delays in processing, and puts a damper on business operations. If the system is current and, in the cloud, the solution to this may be simple.
- However, if a legacy system is in place it may require a move to a new cloud-based ERP system or at least an increased investment in hardware architecture to accommodate the increase.
- Costs can also increase for higher transactional volume and fluctuations because more resources may be necessary to avoid bringing the system to a crawl.
Strains on internet provider resources:
- Internet traffic is increasing as more and more people are working remotely, causing a drain on internet provider resources and outages in some cases. Remote access is affected the same whether on a current cloud system or a legacy system.
Increased threats of ransomware vulnerability:
- With more and more remote access to ERP systems, especially legacy systems, the chance of experiencing ransomware challenges is more possible.
- Two of our clients have been attacked in recent weeks, one of which had over 20 servers infected.
Manufacturing production planning disruption and decreased efficiency
- Most manufacturing system rely on light to moderate fluctuations to properly plan for inventory services levels and production capacity. But rapid changes and volatility adversely impact these areas, causing capacity bottlenecks, increase throughput requirements on work centers, additional shifts and often component material shortages which alter the shipment delivery schedules and increase cost.
- If that was not enough, materials management efficiency can suffer greatly and present costly excess inventory levels and the other extreme of stock outs, both responsible for added costs and declining profitability and customer satisfaction.
6 Actions that can be taken to reduce risk and improve profitability
There are many choices and actions that can be taken to counteract these challenges and threats and maintain or improve profitability during the pandemic. These changes will also likely provide stronger competitive advantages in the aftermath of the pandemic threat and may even increase market share. Not all competitors will recognize the opportunities, and many that do may not be in a position to take advantage, just doing what it takes just survive.
This presents an opening for supply chain businesses to further penetrate their markets and improve profitability. Not every company will consider taking all of these actions, choosing those that will have the greatest return on investment. But no matter how they proceed, the right tools will be needed to pull through these times and arrive in a better position when the threat has subsided. Seven actions are:
Increase system transaction volume bandwidth (see Acumatica’s ERP Evaluation Process here)
- As stated before, for a company on a legacy system to do this, they will likely either have to move to the cloud or invest in hardware to achieve the capacity needed.
- For cloud ERP systems, the provider will usually provide the ability to subscribe to “bursting increases”, whereby for a specific time frame they can increase bandwidth for a charge, and return to normal at a later timeframe
Provide efficient remote access for remote workers:
- For legacy systems, a transition to the cloud will automatically be the best choice, not just in the short term but in the long run as well. Increased competitive advantages, improved technology capabilities and a lower total cost of ownership and operation are among the most promising.
- The move to the cloud also provides greater security protections against ransomware and other strong threats. In addition, most if not all providers provide an extensive fault tolerance advantage, keeping the investment in data safe and secure.
Improve automation and team communications:
- By investing in ERP systems upgrades, preferably the cloud options, automation and communications are improved dramatically almost as a default. Task and activity planning, important system notifications, and automated system capabilities will have a positive impact on efficiency, production and profitability, providing a strong return on investment.
- For example, imaging a supplier cancels an order that affects 10,000 orders that must then be canceled or impacted. One ERP provider uses a thing called business events that can automatically update the related customer orders upon the cancelation by the supplier.
Invest in smart inventory management tools:
- These tools can increase real time visibility and help plan and avoid inaccurately filled orders, reduce the volume of customer returns, prevent loss of customer satisfaction and consequently, market share.
- Proper safety stock policies can automatically be recommended based on real time data. This decreases stock outages, improves customer service and reaction time, and frees up much needed capital to shift to other important initiatives.
- Metrics on inventory value and velocity provide a clear picture in real time, making it easier to accurately track and forecast lead times, and replenishment, all to the benefit of the bottom line.
Invest in state-of-the-art shipping tools:
- Many shipping tools have the ability to manage a multicarrier strategy to reduce rates and stabilize deliveries.
- This helps shipping by providing the ability to shop for rates and choose service selections that best fit the customer’s needs.
As the effects of the pandemic firmly entrench themselves in the current business environment, one thing stands out above all else – it is now paramount, or will be soon, that any company seeking to retain or improve market share, competitive edges, operating efficiency, and healthy profit margins will need to improve their infrastructure and business processes.
While this does not mean that companies on legacy systems can’t improve or even thrive while staying on their systems, in my opinion the evidence strongly suggests that upgrade and migration to cloud ERP solutions and the capabilities realized by doing so is by far the best path to undertake. While the advantages are too numerous to mention in one article, it is easy to see that making the move will be a substantial improvement for the vast majority of companies that are up to the challenge.
For more information on how Cortekx can help, please reach out to us to further the discussion explore ideas together. This is a great time to consider the options available to your supply chain and manufacturing company.