Post-Pandemic Supply Chain Restart

Racing to Refill

When shippers race to refill the supply chain pipeline once the initial market disruption “clears the system,” they may create additional costly disruption. Such a scenario could unfold as follows: 

• Volumes surge: Shippers are unwilling or unable to meter inbound arrivals at distribution centers (DCs) to ensure volumes do not surpass what DCs can quickly unload and return to service.
• Assets stall: Containers and chassis build up in DC yard facilities – creating congestion costs, bobtail charges, and equipment per diem charges, which quickly escalate.
• Chassis run short: Shippers do not have plans that allow them to release chassis quickly back into service (e.g., grounded operations). Chassis tied up at shipper DCs are not available to unload trains or bring empty containers back to the rail terminal, creating overall capacity shortages.
• Railroads snarl: Inbound trains cannot unload into chassis; container stacks at rail yards fill up; ultimately, yards cannot take additional containers at the gate or unload inbound trains. Trains back up onto the main line, intermodal flatcar capacity becomes scarce, and overall rail velocity is impacted for all rail shippers.
• Costs spiral: For an individual 40’ container to reach its DC from a port or inland rail ramp might typically involve a $250 to $350 local dray – which would include the empty return. Now, as capacity shrinks and congestion builds, the same container may incur double or triple the original delivery costs as the box/chassis incurs detention, storage, bobtails, and grounding/lifting charges associated with the backlog (Exhibit 1). In addition, inventory costs rise, product is delayed, and DC productivity deteriorates in response to all of the excess demand being pushed through the system.
• Return to normalcy delayed: It takes many months to clear the inbound volume surge as empties are drawn down and evacuated; eventually, a steady state of inbound/outbound matched flows starts to settle in.

As it has time and again, this scenario is likely to play out once more post-pandemic, as shippers in every market work to get their products into factories or back on store shelves as quickly as possible. Transportation and equipment providers (drayage companies, chassis providers, railroads, etc.) must then try to meet shipper demands while preventing their operations from crashing. Reports are already surfacing of supply chain bottlenecks as China begins to gear up production again but is faced with a shortage of empties stuck overseas (as of late March 2020).

Exhibit 1: Drayage Costs Can Double Or More With Supply Chain Surges

^{Source: Oliver Wyman analysis}

Coordinating a Better Outcome

The longer the disruption, the more severe the impacts on the supply chain are likely to be when the world presses the “start” button once more. This begs the question of whether there is a way to handle the supply surge differently – and thereby get the economy recovering faster.

C-suite leaders at companies dependent on inbound supply chains will be deeply involved with their supply chain planning organizations right now in dealing with first-order impacts.  That means focusing on trimming costs to match the market slowdown and meeting urgent supply chain needs, while at the same time keeping employees and customers/vendors safe. 

Once these near-term issues are dealt with, however, equally important will be figuring out how to ramp the supply chain back up as efficiently as possible. One option can be to create a team specifically focused on developing a rebound plan, that reports directly to senior management. This team can be charged with formulating answers to critical supply chain questions, such as:

• How can we do things differently this time to avoid gridlock in our network?
• What can we do to stage inbound flows to meet DC capacity capability?
• How can we work with our providers (dray companies, railroads, terminals) to help us protect our flows if we help create a fluid network – and not let us get caught up in everyone else’s gridlock?
• What equipment or facilities do we need to secure to protect ourselves from the surge (such as yard chassis, hostlers, a reach stacker, extra container yard space)?   

On the flip side, transportation providers will need to develop better playbooks to mitigate the impact of the coming supply chain surge on their networks. This could include:

• Establishing protocols that differentiate between shippers based on behaviors that aid recovery
• Proactively working with shippers on plans to keep the network fluid
• Building systems that reward shippers for staying within relatively normal bounds for volume flows, terminal dwell, load/empty balance without bobtails, and distribution center dwell
• Identifying partners who take specific, planned measures to mitigate congestion and giving them priority. Operational plans that allow some portion of the network to remain fluid for “good performers” can be a critical step in accelerating velocity on at least a portion of the network, while isolating shipment flows that exacerbate congestion.

Developing such playbooks will be useful not only for the present disruption, but for those doubtless to come in the future. It is in everyone’s best interest to keep the flow of freight fluid, as improving network velocity lowers costs and maximizes asset productivity for all. Both shippers and transportation providers will need to come together and identify new best practices if they are to do better than in the past.

The COVID-19 pandemic has created uncharted territory for supply chains. The eventual supply chain surge is coming, and those who can keep their supply chains fluid will be back to normal much more quickly than those who do not.