The lessons of the crisis: Logistics as a key factor

Challenges for manufacturing companies – Seven immediate measures

The COVID-19 pandemic is putting Germany's key industries to the test: How can mechanical engineering, the automotive industry, and other sectors become more resilient to crises in the future? Many levers for change can be found in logistics. Here, automation and digitalization can make a crucial contribution to the stability and resilience of manufacturing companies.

In an already strained global economic situation, a global crisis is emerging that threatens to bring production and supply chains to a standstill: Corona-like scenarios were previously only known from simulated stress tests. Since March, the test has become reality, providing manufacturing companies with insights into their strengths and weaknesses. As the pandemic is not yet over and similar crises could occur in the future, it is time to develop action plans to prevent crisis-related production and supply disruptions.

Corona shows the need for action in logistics

The corona pandemic is inevitably driving forward digital transformation, especially in the “key industries”, i.e. those industries that are of particularly great economic importance due to their innovative strength, size and interconnections with other sectors of the economy. The focus is on logistics: Although many companies have reduced their production, logistics must maintain supply chains and flows of goods. But while new working models such as home offices and virtual meetings have made their triumphant progress in other areas, the supply chain is still struggling with digitalization. The time is too short to adapt all capacities and stocks to the new challenges. This is all the more serious because consumer behavior has changed, which has been made clear by the temporary sales of numerous goods such as toilet paper, disposable gloves and disinfectants. The wheels of order, planning, production and delivery no longer meshed with each other.

The challenge: to prepare for new situations early on.

Consequently, many companies need to optimize processes along their supply chains – the supply chain must be designed to be more proactive and digital. The pandemic has revealed that digital transformation is still in its infancy, especially for small and medium-sized enterprises (SMEs). The danger is that large companies will continue to expand their market share while others fall behind. This is because the "big players" have better networks and are more advanced in digitalization. However, it would be a fatal mistake to conclude that SMEs inevitably fare worse than corporations in crisis situations. The decisive factor is not company size, but time: it is crucial to be able to adapt to changing conditions as quickly as possible. For many, especially SMEs, this means modernizing, becoming more flexible, and thus stabilizing their operations. In doing so, the focus should be on the digital and logistical infrastructures that are indispensable for key industries.

Seven immediate measures

However, this does not mean that companies lack options until policymakers create the infrastructural prerequisites for a comprehensive digital transformation. On the contrary, SMEs can and should drive a rapid shift towards more automated and digitized operations. Furthermore, it is essential to examine and optimize the structure of the company's own logistics. It is worthwhile to consider seven possible scenarios in this regard.

1. Accelerate warehouse automation.
The warehouse has to close due to COVID-19 infections – now what? Many companies don't even have to consider this scenario, because their logistics centers are fully automated, making them more efficient, flexible, and resilient. Logistics providers should therefore use the current situation as an opportunity to gradually increase the level of automation in their warehouses. The long-term goal must be full automation. In Japan, this is already a reality in many places, for example at the fashion group Fast Retailing, which plans to equip all its warehouses worldwide with robots and artificial intelligence and has already implemented this in the greater Tokyo area.

Suitable for:

• Fast Retailing – How Japan is already working on the future of tomorrow
• Autonomous retail systems

2. Increase Inventory Levels
Before the pandemic, just-in-time delivery was considered the ideal for goods delivery. The advantage: Precise delivery to the assembly line allows manufacturing companies to minimize their warehousing costs, as no parts need to be stored. However, as deliveries are frequently delayed or fail to materialize, as has happened often in recent months, the lack of inventory leads to production losses. To reduce the risk of future production disruptions, companies should maintain larger inventories of critical and frequently used components.

Suitable for:

• Buffer storage: For e-commerce, retail and manufacturing industries

3. Reshoring or Onshoring of Production:
As global supply chains slowly recover, manufacturers are reassessing their processes. Many are considering reshoring, i.e., relocating parts of their production back to their home country. This applies not only to the pharmaceutical industry but also, for example, to mechanical engineering, which has been severely impacted by the pandemic. Furthermore, many companies will expand their production capacities in key target markets to avoid disruptions due to supply chain gaps and to ensure the supply of their customers. A recent study by the McKinsey Global Institute (MGI) (Risk, resilience and rebalancing in global value chains) predicts that up to a quarter of global supply chains could be relocated to other countries within the next five years.

4. Scaling Storage Capacity:
For some logistics sectors, the pandemic caused complete overload, while demand collapsed in others. As a result, some suppliers were left with unsold goods, while others lacked sufficient stock. To avoid out-of-stock situations and overcapacity, intelligent IT systems that enable demand forecasting are essential. Many companies are already scaling their storage capacity in this way; all others should use the uncertainties of recent months as an opportunity to raise the bar for their demand planning.

5. Small, decentralized warehouse locations (hubs):
Huge fulfillment centers are out. Instead, the trend is increasingly toward several small satellite distribution centers, so-called hubs or micro-hubs, located near customers. The advantages are obvious: a more stable supply chain, greater speed, and flexibility in dealing with fluctuations in delivery times. Another interesting aspect is returns handling, which often represents a significant cost factor for suppliers: In a current project by the Mönchengladbach Economic Development Corporation (WFMG), the so-called "Fashion Micro Hub," customers can pick up clothing they previously ordered online on-site, try it on, and return it directly if it doesn't fit or they don't like it.

Suitable for:

• Local decentralized hubs – logistics centers

6. Focus on E-Commerce
According to a report published by Adobe in summer 2020 on Forbes (Forbes: COVID-19 accelerated e-commerce growth '4 to 6 years'), the COVID-19 pandemic is accelerating the growth of e-commerce by four to six years. The enormous increase in the importance of this sector presents logistics with major challenges: warehouses and distribution centers must be expanded accordingly and geared towards automated single-item picking. Fast and flexible single-order management, especially in the form of fully automated split-case picking, will become a core competency in intralogistics for many industries in the future.

Suitable for:

• Business digitization – Digitization of companies (Data and facts as a PDF for download)
• If the goods have to leave the warehouse quickly today

7. Energy Efficiency:
Anyone who incorporates this aspect into their planning will see results in the medium term. It's worth taking a look at the online giant Amazon, which has already equipped 50 of its logistics centers worldwide with solar panels – around five years ago, there were none. Resources can also be saved in other areas, for example, by using reusable transport solutions: Replacing single-use packaging with durable and recyclable reusable boxes, which can sometimes be used for ten years, saves enormous amounts of packaging waste and disposal costs.

Suitable for:

• CO2 neutrality with photovoltaics – Learn from Amazon Logistics
• DAIFUKU: Green logistics – individual measures not effective

The Corona pandemic is forcing us to rethink our approach.

• Now: Modernization and digitalization of supply chains
• The Corona pandemic and its effects on key industries: What you need to do now
• 7 points and one chance: The corona pandemic is forcing us to rethink