Just-In-Time: Trends & Future Developments in Supply Chains – Issue 3

Mayer Brown
Interviewer:   Bill Amos, International Arbitration partner, Mayer Brown (Hong Kong)  
Interviewee: Juergen Mahn, former MD at Chief Sourcing Office Asia for s.Oliver
“Just-In-Time” is a series of written interviews with experts from different backgrounds, all of whom have extensive experience with supply chains, including knowledge of current trends and future developments. Similar to the “just-in-time” supply-chain philosophy, we strive to bring valuable insight when it is needed most, particularly in light of COVID-19 and an increasingly volatile geopolitical environment. This series will continue in the months ahead as we seek further guidance from clients and friends on the state of global supply chains and distribution contracts.

1. Is COVID-19 accelerating positive or negative supply-chain trends?

The current pandemic is actually driving positive and negative trends.
Regarding negative effects, COVID caused major disruption in the supply chain across the globe and especially in Asia. Many countries have been in partial lockdown, so supply of goods was challenging basically the entire time.
On top of all this, transportation is a complete mess because goods get mainly shipped from Asia to Europe/US, so there is a shortage of containers in Asia. This year there has been a big rise in demand for containers due to the increase in Europe/US imports. Without the options of overseas travel or restaurant meals, locked-down consumers were spending more on manufactured goods, and so there was a corresponding jump in trade and China exports. Laden containers went to Europe/US but, due to COVID restrictions, those now-empty boxes were a lot slower than usual in coming back to Asia.
Shipping freight rates have also increased dramatically, for similar reasons, with increased trade volume meaning more demand for space on vessels. Also, the disruption to the supply chain, in terms of COVID restrictions and port congestion, caused a reduction in the available carrying capacity on ships.
Airfreight is also an issue because the entire travel industry came to a stop, so all that air-cargo space is gone. Much of the available space is still taken up with huge deliveries of medical and protective equipment. Airfreight prices went up like crazy as a result.
The positive side to the pandemic is that companies need to be more creative in their thinking in order to overcome issues. Many things now happen online at tremendous speed , for example using Zoom to connect with supply-chain partners rather than traveling and visiting them. So companies are forced into new ways and more innovative ways to do things.

2. Do you think governments will play a bigger role in the future of international supply chains or are recent developments temporary?

I can only hope it is temporary but I’m afraid it is not. Whatever special rules are in place due to COVID will take some time to disappear. Where there is a shortage of vaccines or other materials, countries may place bans on their export.
Vessels will continue to experience delays in cargo operations due to government restrictions, which have also made it very difficult for ship owners to change their crews.
The movement towards decarbonization is another area where governments will intervene in supply chains. There will be mandatory regulations to reduce carbon intensity, such as the EU Emissions Trading System which is set to be applied to the maritime industry by 2023.

3. What has been the impact of the US & China trade war/sanctions?

This is an extreme example of national tariffs, which is making things in Asia even more complicated. A lot of US firms are trying to diversify into other Asian countries, while Chinese companies are trying to find production capacity outside China as well. All this is leading to even more critical peaks in certain countries.

4. What do you think supply chains will look like 10 years from now?

I would love to know that, but unfortunately I don’t have a crystal ball. Things change on a monthly basis. That said, I think globalization will come to its limits and local supply will be even more important in the future, as manufacturing companies need to ensure the local availability of components and parts.

5. Are there business models connected to current supply chains that you think may falter in the future?

The blockage of the Suez canal by the “Ever Given” has shown us how easy it is to disrupt the global supply chain, so I think many models based on an elaborate “just in time” supply will be in danger. An example of this is the “just in time” approach for the car industry, which is facing major shortages right now. If a particular component does not arrive in time then the entire production is at a standstill, which costs the manufacturers a fortune. If you are a fashion retailer and there is, say, a blue jacket or a shoe that is missing, it doesn’t matter. But if you are a car manufacturer and just a single part is held up in the supply chain, it kills your business.

6. What are some of the drivers of future supply-chain developments?

Supply security and local availability:
As I said concerning the “just in time” approach, it will be essential to secure the supply chain to ensure the availability of all components. This need for supply security is a particular issue for the automotive and engineering industries, but not so much for retail where the absence of a particular item is rarely a catastrophic problem.

Government tariffs and import duties:
Apparel production does not have to be as sophisticated as other industries, so production tends to be wherever manufacturing is cheapest. If there are problems in one country the production can be switched elsewhere within a couple of months. A big factor from an EU perspective is tariffs. For some of the poorest countries such as Bangladesh, Pakistan, Cambodia and Myanmar for example, the EU imposes no import duties on their clothing products. The intention is to help developing countries by granting them duty-free imports, although it is all Chinese investment anyway! For a buyer, tariff-free imports can result in a 10% saving on the cost of goods compared to other countries. The apparel industry is always balancing between these different markets because, apart from China, there is not one market/country where you can get everything. This means that for logistics you have to be able to get the products to the “selling markets,” i.e., the West, all at the same time. It is a complicated system of sea and air freight, and more so now for the reasons mentioned earlier—e.g., in Asia you cannot get containers and air freight is drastically reduced.

Can you tell us about the sourcing and logistics process?

The headquarters of a retailer or its regional product team will develop a product idea and will send that product concept to their sourcing people or agents. The sourcing team has to convert that piece of paper into the product, and will do so by working together with the Asian manufacturer. Regarding the logistics process, larger retailers will have a nominated global forwarder. The local Asian seller/supplier will deal with the global forwarder’s local agent. As soon as the goods are handed over to the forwarder, the risk of transportation will generally pass to the buyer. That is because FOB is the normal delivery Incoterm, so the risk passes as soon as the goods are delivered to the carrier at the loading port. If there is any, say, wet damage to the goods the assumption will be that it is the forwarder’s/carrier’s problem, unless they can point to a pre-shipment issue. If the retailer works with a larger and more responsible supplier, the goods should hopefully be stored and looked after better prior to shipment.