Episode #13 - Update on Coronavirus Affecting the United States' Supply Chain
The Industrial Advisors discuss the latest updates on COVID-19 (aka the coronavirus) and its impact on the United States’ supply chain with Todd Steffen, Vice President, Supply Chain & Logistics at Colliers International.
Bill Condon: Welcome everybody. This is Bill Condon and Matt McGregor. Welcome to our 13th podcast episode. Today's topic will be the current state of the supply chain and we're fortunate to have as a guest again, Todd Stephan who is the Vice President of Supply Chain Consulting at Colliers and widely considered one of the top thought leaders in the entire supply chain industry.
Bill Condon: And if you remember, we had Todd on about three weeks ago to discuss the impact the Corona virus has had on the supply chain and a lot has changed in the three weeks since we've had them on. So Todd, I think that's a really good place to start. Why don't we start with that? What's different between now and three weeks ago, as it relates to the supply chain?
Todd Steffen: Hey Bill, glad to be with you both, you and Matt. Thanks for having me back. That's a great question. And boy, quite a bit's changed. Just to remind us, it seems like forever ago, but just to remind us of where we were at three weeks ago. We had great momentum in Q1, leading into the COVID-19 pandemic situation from a supply chain standpoint and really an industrial real estate momentum standpoint, driven largely by supply chain.
Todd Steffen: We had great resiliency, I think so far, through the COVID-19 pandemic as a result of that momentum that we had coming in from Q1. Obviously, we were dealing at the time three weeks ago, with the effect of a drop in supply availability from China and factories were just coming back online and folks were getting back into those factories. I think at this point now, we've had a shift, a massive shift in that the supply is available in the global supply chain, but the demand from the Western sector has essentially tailed off in large parts and it's really a tale of two sectors.
Todd Steffen: Grocery, food and medical are roaring and raging ahead, occupying a lot of the industrial capacity, the current and growth. And then also you have just a really drying up of apparel and furniture and anything service related, anything that relates to the service industries. So, just within the last three weeks, you've seen a massive shift from a lack of supply to a lack of demand. That lack of demand has resulted in many blank sailings from Asia and essentially, a lack of passenger airline travel as well.
Matt McGregor: Hey Todd, what do you mean by blank sailing?
Todd Steffen: Yeah, sorry Matt, so blank sailing. So when I say blank sailing, essentially the ocean liners have decided to skip certain scheduled shipments on their schedule.
Matt McGregor: Okay.
Todd Steffen: So because at first, the supply wasn't there and now the demands not there. The other big shift that's happened in the last few weeks is that the airliners that used to carry passengers up top and then cargo in the belly, those airline trips have stopped and therefore, UPS, FedEx, United Airlines, American Airlines, have all now started cargo only air freight shipments. I should say, American and United have started cargo only. Obviously, UPS and FedEx had have had to add to their capacities.
Todd Steffen: So those are some of the big things that have changed within the last three weeks. Obviously, the way the supply chain operates in the US is drastically changed as well. Bill, back to your question. Essentially, I was on with 12, top retail DC operations leaders, the other day on a call and the way they run their DC operations and supply chains have drastically changed, right? Everything from temperature checks at the door for all employees, to social distancing within their facilities, pay hikes and incentives to keep the folks coming back to work, deep cleanings in between shifts. And as we saw before, a massive shift to e-commerce underway, even accelerating more so than before.
Matt McGregor: Todd, you mentioned that obviously, with the drop in supply, we've noticed a huge surplus of temporary storage needs, to the point where one well-known sports shoe company is looking for 5 million feet for overflow storage. Is that just because the malls are all shut? Talk to us about that, about just this massive need for temp storage.
Todd Steffen: Yeah, Matt, great question. So I'm seeing it as well. I have one client in the market for 800,000 square feet of seasonal, short-term, one year, 12 to 18 months storage in the Southeast. And essentially what happened was, that the change came upon us so quickly and the lack of demand and stores shutting down and that kind of thing, that those orders that were made to Asia a few months ago, couldn't be stopped. And essentially, that inventory was on its way. It hit the port and then it has to go somewhere.
Todd Steffen: It usually goes through a cross dock or a transload facility, to then move on to the retailer's DC. Well, the retailer's DC's serving brick and mortar, in some cases are either at a greatly reduced operating capacity or are closed all together and retailers have shifted all their labor and capacity over to eCommerce fulfillment and that brick and mortar inventory has to go somewhere. So essentially, the short-term storage requests are skyrocketing as a result of that.
Bill Condon: Let's stay on e-commerce topic for a second. We've obviously seen a huge acceleration there. How do you think e-commerce is going to be affected in the future, moving forward?
Todd Steffen: Yeah Bill, a great question. Without a doubt, this is going to be the single greatest accelerative catalyst for e-commerce growth in the US and therefore, have a direct impact on the acceleration of conversion of industrial capacity. So I think that now, the baby boomers and those that maybe are even older than baby boomers, that were hesitant to get online for whatever reason and do a certain amount of purchasing, are now exclusively doing purchasing online, including grocery delivery.
Todd Steffen: So I think you're seeing a doubling and tripling of the pace of change now and I don't think that's going to go back to business as normal for those brick and mortar retail organizations. So the ones that were ahead of the game, shifting to eCommerce and staying ahead of consumer demand, are going to thrive and their supply chains will continue to accelerate evolution. And those that did not get on board with the e-commerce, trying in a big way, are going to be left out.
Matt McGregor: Todd, I couldn't agree with you more on that. I know that in the US, we were averaging about 11% of all retail sales, were e-commerce through 2019 with a peak record level in December of 2019, just a few months ago at 14.6%, of all sales in December, retail related were online in the US versus brick and mortar. In comparison, in that same time-span in 2019, if you combine China and Korean retail sales of 2019, 44% were online versus just about 11% in the US. So it seems like to your point, not only were we behind, but we've got a long way to go. If you think of, I don't know about you guys, but I feel like every day I come home and I've got a stack of Amazon boxes at my house. But boy, the US is really behind. And to your point, Todd, this is really going to accelerate it.
Todd Steffen: Matt, I couldn't agree more. If you think about where China for example, hit with regards to e-commerce, percentage of total sales during COVID-19, when their retail was shut down in large part, it hit over 60%. So if you think about it, they hit a peak of 60% and came back to that 44% number that you mentioned. I think the same thing's going to happen here. If we peaked at 14% in December, up from an average of 11 you know, I could easily see us getting to double that number very quickly depending on the duration of this situation. And as a result, I don't think it's going to ease back much toward brick and mortar.
Matt McGregor: Yeah, I couldn't agree with you more. One thing we probably should have noted at the beginning of this call, we're all in quarantine like everybody else. And so this is our first podcast that we're all dialing in for, so we apologize for the audio quality of this as this is the first time we're all in separate locations. And in fact, this is the first time I've seen Bill in a few weeks. I can see him online here and Bill, I think you're cheating. It looks like somehow, you got a barber going on because your hair just looks great.
Bill Condon: Well, I'm keeping it clean. I'm not letting it grow out like a lot of people, I've got to keep it clean.
Matt McGregor: That's right. That's right.
Bill Condon: Yeah.
Matt McGregor: Well back to supply chain. So Todd, with the change in demand and you got all of this freight still coming in here. Let's talk about the freight, ocean, air, and over the road. So we've got all this freight moving without people buying it. Update us on the movement of freight.
Todd Steffen: That's another thing that's really changed in the last few weeks. So as I mentioned, passenger air trips have stopped. Basically passenger, in large part and therefore, the cargo that went in the belly of those flights, now had to find another route. So American and United have, like I said, started cargo only flights.
Todd Steffen: However, I just heard this morning, I was on an international supply chain leadership call and I just heard that flights are being controlled for all medical related items, by the Chinese government now. And there's a kind of a political scuffle going on between China and Hong Kong and the flights out of Hong Kong are being highly regulated with anything having to do with medical devices or equipment or you know, masks, gowns, that kind of thing. So just something to be aware of that that's a particular sector specific situation.
Todd Steffen: But basically, China's using their control of all the medical related response gear to this pandemic for political reasons. It's interesting, I saw France ordered, I think they put an order for one billion, N95 masks and at the last minute, this just came out as well, at the last minute before those masks were going to ship to France, I guess the US swung in while the masks were on the tarmac and put down cash to three or four X, the amount of the French payment and basically, took the masks out from under the French and those masks are now on their way to the US.
Matt McGregor: Wow.
Todd Steffen: So, an incredibly fluid dynamic situation. With regards to ocean, as I mentioned, there are blank sailings to the US and UK based on deferred demand or really demand that won't materialize. And then US domestic over the road transportation has just been decimated with this lack of demand as well, last, the truckload shipments are way down. And really, the only thing that's boogieing the transportation sector from a truckload standpoint, is grocery and medical and COVID-19 response. Obviously, all the parcel that is shipping, so parcel 3PL, medical and grocery are really what's going on in the transportation, in the US transportation sector.
Bill Condon: Yeah. You know, Todd, you touched on this a little bit earlier, but distribution center operations have obviously been greatly impacted and how they operate. What are the biggest adjustments that US being, in the way that DCs are operating these last couple of weeks?
Todd Steffen: Great question, Bill. I think the main things that I've noticed are that obviously, the employee safety, which was always a top priority for operators, is now just so much more pronounced because as soon as there's an outage, it can affect the whole facility, which is so different than before. So now there's temperature checks at the door, there's social distancing going on and very specific procedures around temperature checks and what to do as a result of certain outcomes.
Todd Steffen: And then, contracts are already in place to fully clean the DC. Deep clean the DC and disinfect the DC if contamination is found. And these could take two to three days for a 500,000 square foot facility to do the deep cleaning. There's social distancing going on within the facility. Of course, in the break areas and cafeterias, chairs are being removed so everybody's six feet apart at all times.
Todd Steffen: The training going on for folks in the DCs, is all virtual in a lot of cases now. So there's not a direct contact with a trainer and a trainee at the same work station. And as I mentioned before, I mean essentially, the operations are being restructured so that safety is the primary priority in a whole new way now.
Todd Steffen: And that includes restructuring the DCs as far as where employees can enter and quarantining essentially, sections of the DC so that if a contamination is found in a certain section, they don't have to shut down the whole DC. So it's just an amazing shift that's happened within days, with these massive DC operations, but pretty common across the industry, what I'm seeing, these changes take place.
Matt McGregor: Todd, one last quick question. I know we hit you with this before, but from some of the basic supplies, are we getting back to somewhat normal levels of the ones that people just bum rushed in the stores, which was like toilet paper and hand sanitizer and cleaning supplies or are those coming back online or where are we at with those kind of essential products?
Todd Steffen: Yeah, Matt. I think they're coming online, they were always online. Obviously, the hoarding depleted supply. I'm seeing the major retailers take some excellent steps with regards to monitoring consumption and limiting consumption. Obviously, the retail locations that are open, like the Walmarts and Costcos and that kind of thing, have excellent programs around social distancing for customers in checkout lines and things like that.
Todd Steffen: But definitely limits on paper towels, toilet paper, any sanitizing wipes, cleaning supplies, things like that and medical supplies, are starting to keep those in stock for a longer period of time. I'm seeing grocery bounce back wonderfully and really be in stock. Again, Trader Joe's, Whole Foods, limiting the number of customers that can be in a store at a given time. Making sure they prioritize older populations of folks having access to groceries without a lot of people in the stores and that kind of thing. So I think that's all helping and I'm seeing new supplies showing up on the shelves and lasting longer.
Bill Condon: Well this has been great. Once again Todd, we want to thank you. And hopefully, when we do our next supply chain COVID-19 update in a few weeks, the majority of this will be behind us and things will begin to start to stabilize. Obviously, you're at the forefront of that and we look forward to an additional call with you, hopefully buttoning up the top of this horrific situation that we're all dealing with. We want to thank you Todd. This has been great. Appreciate your expertise as always. And thanks for our listeners for tuning in.
Todd Steffen: Thanks Matt for having me and stay safe and healthy, to you and all your listeners.
Bill Condon: Thank you very much.
Matt McGregor: Bye Todd.
Bill Condon: Appreciate it.