While companies are investing in new supply chain automation initiatives, they are framing much of that around risk management.
While last year was a period of unprecedented economic and supply chain disruption, few expect a return to pre-pandemic times in 2021. Ongoing concerns about the virus, a slowing global economy, and the potential for new regulations due to a change in US political administrations mean that finance professionals still have challenging times ahead.
As organisations invest in new supply chain automation initiatives, software, and talent, many are framing these decisions in the context of risk management, according to Steven Bowen, founder and CEO of Maine Pointe, a supply chain consulting firm based in Boston.
"The CFO really needs to understand the business issues, not just the surface, cost, or cash issues, but the underlying issues. They need to connect with the supply chain people in how that translates to the income statement or balance sheet,” Bowen said.
Here are five supply chain investments for finance professionals to consider in 2021:
Driving resilience through digital transformation
Organisations have made incremental investments in supply chain visibility for more than a decade, but the pressure to adapt has increased. Eighty-five per cent of supply chain leaders struggled with “inefficient digital technologies” during the disruption in the second quarter of 2020, according to a survey by McKinsey.
A large part of resilience and reducing risk comes back to digital transformation and visibility across the entire supply chain, Bowen said. While many have been on years-long implementations of digital initiatives with enterprise resource planning providers, many are now looking to independent software vendors (ISV) that can enable them to move to the cloud more quickly.
"With the major disruptions that 2020 brought, many of these organisations were not equipped to adapt quickly. CFOs are now looking at designing an architecture that can respond quickly. ISVs will have a huge impact on companies’ ability to manage operations, make key decisions, and be supply chain resilient,” Bowen said.
Despite the challenges, many CFOs did find a silver lining in 2020, according to the PwC US CFO Pulse Survey. Nearly three-quarters said they would be more resilient in the long run, and half said the new ways they are serving customers have put them in a better position. “We’re now seeing things that would have taken 12 months getting done in only six weeks,” said New York City-based Neil Dhar, vice-chairman, Clients, Markets and Sectors at PwC.
Machinery, automation, and physical improvements
As social distancing, quarantines, and physical disruption are likely to remain a reality throughout 2021, CFOs will continue viewing automation as a tool to reduce risk, said Bernie Donachie, managing director and head of the supply chain practice for global consulting company Protiviti. Automated picking systems, warehouse conveyor systems, and autonomous mobile robots now offer double benefits by supporting social distancing and increasing efficiency. The continuation of historically low interest rates is likely to make these investments even more attractive through 2021, Donachie said.
“Many are looking at how they can have a [distribution centre] or warehouse with fewer people but more SKUs and parts with someone sitting at a keyboard and picking rather than interacting with other people in the warehouse,” he said.
Finance professionals will also look to artificial intelligence-based software solutions to help automate repetitive tasks in both the warehouse and office, Bowen said. One technology growing in popularity is automated procurement contract reviews.
“If you can take away those mundane tasks and automate the whole procure-to-pay process, you can free up that labour. Intelligent labour is a precious commodity, and you need those people doing the more high-order, high-value tasks,” Bowen said.
Talent and workforce
Organisations are also expected to invest more capital in supply chain talent in 2021. Even as organisations automate more low-value tasks, they still need talent with competencies in compliance, procurement practices, planning, analytics, and process engineering, Donachie said.
Nearly 60% of companies say it is hard to find employees who have both tactical/operational experience and professional competencies, according to a survey of 350 supply chain professionals by global logistics company DHL. DHL noted that leading companies are investing more in robust talent pipelines through clear career paths, education, cultural adaptation, talent development partnerships, and other means.
“Supply chain is becoming more sophisticated. Having people that are well trained and know the cost of capital, how to do forecasting and demand planning, and how to manage the supply base is critical,” Donachie said.
The growing importance of trade compliance will lead organisations to consider talent, solutions, and outside resources that focus on trade controls, said Kerry Contini, a US-based international trade partner at the law firm of Baker & McKenzie LLP. Contini noted that the US Treasury’s Office of Foreign Assets Control (OFAC) has taken a closer look at supply chain in recent years. OFAC released a compliance framework in May 2019 and has brought several enforcement cases upon organisations that violated trade sanctions in their upstream sourcing.
While many large organisations already have trade compliance programmes, they may have to reallocate more internal resources to put a greater focus on supply chains.
“There may be gaps in how the trade compliance programme works in the upstream supply chain context, as historically many companies have put more emphasis downstream. Companies may want to consider engaging outside resources to assess their trade compliance risks and to ensure that they have good restrictive party screening software and other appropriate compliance processes in place,” Contini said.
New channels and growth
Consumers' large leap to digital channels and increasing expectations about omnichannel shopping and rapid fulfilment continue to pressure supply chains, Donachie said. As a result, many organisations are revisiting agreements and services with software providers to ensure the services can optimally support the growth. Organisations are also leveraging customer data to identify what trends may drive their behaviours in 2021.
“There’s a lot of capital being spent on analytics to understand the customer, what the trends are, and what the ecosystem is going to be like when we get back to a steady state,” Dhar said. “It’s all about driving growth.”
Some companies are also investing in the supply chain infrastructure required to support direct-to-consumer (DTC) channels. Disruption from the pandemic has led many brands, such as Nike, PepsiCo, and Adidas, to explore or expand DTC channels.
Donachie noted that the growing willingness of consumers and businesses to buy large items online, such as cars through Carvana, is leading companies to explore new distribution models. “Now with COVID and people’s [growing] comfort levels around technology, it is changing how and what they buy through digital channels,” Donachie said.
— Craig Guillot is a writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.
Food is very fungible, says Tony Pelli, supply chain risk consultant at London-based BSI Group, a 117-year-old global business standards company. According to the dictionary, that means it’s interchangeable.For cargo thieves, that makes food a desirable target. “It’s easy to find people to buy food,” Pelli explains. “They sell it into the black market or to legitimate companies. They can pose as distributors. Once it’s in the supply chain, there’s no evidence after it’s consumed.” No country or region is safe, Pelli adds. “In South America and India, staples like wheat, rice, soy and corn are stolen. In the United States, Germany, the U.K. and Italy, things like energy drinks are stolen a lot. Regional specialty foods are targeted, too. In Italy, aged Parmesan cheese; in Chile, salmon; and France, champagne. In the United States, higher value fish and meat are targeted.”
Tentacles of Cargo Theft
Some areas, of course, are higher risk than others. Late last year in Mexico, specialty foods and a high-risk region came together in a perfect storm when 14 trailers carrying about 25 tons of frozen octopus were each hijacked. Over a 30-day period, thieves stole trailers in the Yucatan region on federal roads between Veracruz and Puebla. At last report, authorities had caught three thieves and recovered only one shipment, according to The Yucatan Times. Shipments now are being guarded by the Mexican army and navy. “In most countries, there are high-risk areas where it’s easier to target food than other products,” Pelli says. “Southern California, Rio and Sao Paolo, Brazil, are others. And there are a lot more food shipments than pharmaceuticals and electronics.” Sometimes, even though the thieves might escape, the authorities catch the “middleman.” In 2010, a man named Johnny Ray Smith was arrested by the FBI and later sentenced to four years and two months in prison on charges of conspiracy; buying, receiving and possessing stolen goods; as well as money laundering. He also was ordered to pay approximately $994,000 in restitution. The FBI said Smith and a partner—who received a lesser prison term for cooperating in the investigation—bought and received goods stolen from nearly two dozen interstate tractor trailer and container shipments valued at just under $2 million. They then sold the goods at discounted prices to wholesalers and consumers in the Southeast U.S. Many of the products were en route to major retailers, including Best Buy, Lowe’s, Target and Walmart. Among the goods was an $86,000 shipment of Starkist canned tuna.
The Path of Least Resistance
Cargo thieves seek the easiest target, says Michael Notarangeli, executive vice president of logistics at Maine Pointe. “Opportunistic thieves will simply work a ‘pareto’ of highest value freight with the lowest level of security and governance and then make their move.” (The pareto principal, also known as the 80/20 rule, states that for many events, roughly 80 percent of the effects come from 20 percent of the causes.) “Owners and shippers of high-value freight have changed processes and added security measures to protect their shipments, while the food and beverage industry has lagged in this area,” Notarangeli adds. “Some of the problem is the very nature of the food and beverage supply chain—well-marked vans or reefers, multiple stops on a route, a single driver leaving the truck, and cargo unattended while delivering inside.” Unattended trailers and loaded trailers waiting for pickup at a dock or awaiting transfer in a yard are also targeted. Even the driver shortage plays into it. “With capacity tight, new drivers may arrive to take a shipment. Shippers must ensure that proper vetting procedures are in place to verify credentials before releasing the shipment,” says Notarangeli. Fictitious pickups are on the rise, according to the SensiGuard Supply Chain Intelligence Center, which has documented increases in both the volume and value of cargo theft year-over-year since 2008. “In these events, cargo thieves arm drivers with fake IDs or devise fictitious businesses to pick up cargo as a way to divert and steal goods,” the company says on its website. “These criminals know how to navigate load boards and effectively target high-value loads.”
The Way of the CriminalSensiGuard Supply Chain Intelligence Center’s Global Cargo Theft Risk Assessment report for 2018 assigns a cargo theft risk rating (from one to five, with five being most at-risk) to each country, based on seven categories: corruption and organized crime, weather and natural disasters, war and terrorism, labor disputes, cargo theft, civil unrest, and infrastructure. The report also shows the modus operandi (M.O.) of thieves around the world. Here’s a brief look at a few of them, with their cargo theft risk rating in parenthesis:
- United States (4): Typically, the entire tractor and/or trailer are stolen while unattended at a truck stop or rest area. Pilferages have been recorded outside of destination facilities and can be indicators of a larger scale theft to come.
- Mexico (5): Over 70 percent of thefts occur in-transit, where cargo vehicles are intercepted by groups of armed men. Criminals employ tactical jammers to block GPS signals while they unload cargo in nearby warehouses.
- Bolivia (4): Criminals take advantage of the slow speed of cargo vehicles on slopes or passing the speed reducers to climb on it from trees, cutting the tent to then throw the load to the road without the drivers noticing.
- Panama (3): The most common M.O. is the impersonation of police officers to detain vehicles, at which point a group of armed men threaten and restrain drivers. Recently there have been reports of incidents in which a woman drugs the driver so he can be beaten and robbed by her accomplices.
- Brazil (5): Most thefts occur by hijacking, when the load is in-transit or being unloaded at its destination. Drivers are approached by armed men, and the truck is either taken or the drivers are forced to follow them to a deserted place where the cargo is transshipped.
- South Africa (5): The use of heavy firearms and explosives is common practice and drivers are often shot.
Cargo thieves are adept with technology, so it is incumbent upon logistics companies to fight fire with fire. One method, SensiGuard says, is with an electronic freight security (EFS) system. EFS programs specifically focus on the highest risk areas of transportation, where the majority of full-trailer load cargo theft occurs. Embedded devices in the cargo provide real-time location, status and condition via the Internet of Things (IoT) and GPS devises, providing critical alerts should the truck go off course or stop for too long. Maine Pointe’s Notarangeli advises shippers and operators to take a multiprong approach to prevent cargo theft. Some best practices include:
- Build awareness around safety and security of all actors in the supply chain.
- Modify business processes to eliminate gaps in security.
- Know your drivers—ensure that warehouse staff are checking credentials and performing extraordinary security audits to prevent fake drivers from infiltrating the supply chain.
- Improve visibility and tracking of higher value inventory/rolling assets, and install security protocols all along the fulfillment continuum.
- Install locking, access control and theft prevention technology on vehicles and trailers, warehouse conveyance, and harden the warehouse security.
- Consider driver teams to prevent unattended freight.