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Analysis

How the Pandemic Disrupted Logistics Chains

By Alejandro Enríquez | Wed, 05/19/2021 - 13:19

COVID-19 exposed the fragility of global supply chains and accelerated the trend toward regionalization, or nearshoring, industry leaders say. As companies pursue economic recovery, technological innovation is also helping to optimize operations via data analysis capabilities. "Digital is reshaping the transportation and logistics industry in ways that will have a dramatic impact on the flow of people and goods around the world," states Boston Consulting Group in a thought leadership piece.

For leading logistics players across Mexico's major industries, namely health, oil and gas, automotive, aerospace, and mining, technology adoption is a key trend that emerged in the past year and will play a bigger role in future investments. Other highlights from the pandemic year were the emergence of ambitious self-storage players to support last-mile deliveries and an emphasis on stronger environmental requirements to meet decarbonization goals.

Nearshoring

Nearshoring became a buzzword after the COVID-19 pandemic shook global supply chains. CBRE suggests that Mexico’s northern region is in a key position to capture investment and companies interested in operating in North America, as companies are relocating production closer to where large consumer markets are by taking advantage of the opportunities that neighboring developing economies present. This is the case for the US and Mexico, which is in a similar situation to Germany and Italy and their relationship with Eastern European countries and Turkey, for instance.

"We want to reinforce nearshoring among Western companies established in Asia and then we will look to the rest of the world. This is where we see the possibility of success in integrating value chains," Alfredo Nolasco, General Manager of Chihuahua Global, one of the main logistics players in the northern part of the country, told MBN, referring to a major trend among companies that previously relied on a strong supplier base in the ASEAN region but that are now either sourcing new components from North America or inviting their suppliers to move closer to where end production is.

The automotive supply chain is the clearest example, although USMCA's new rules of origin for automotive goods greatly influence nearshoring trends too. Over the last year, regionalization and nearshoring have created two scenarios for Mexico. One is that large Tier 1 players either expand their operations in the country or ramp up production. Second, Tier 2 suppliers are further encouraged to meet RVC requirements established in USMCA. Chinese suppliers like Yanfeng are developing a strong footprint in North America, opening a new plant in 2020 and another expected before the end of 2021. "Yanfeng is relatively young in North America but we are expanding our presence in the region," said Lourdes Cobos, Yanfeng's COO. Another example is aluminum casting company Le Belier, which was acquired by a Chinese holding and recently announced a US$68 million investment for a new plant in the Bajio area.

These trends have driven organizations to strengthen their operations in the region. "Our goal now is to keep regional supply chains moving not only in Mexico, which is our hub, but in the entire region. By using flights and reinforcing airlifting operations, we have maintained air connectivity in Latin America between Mexico, Colombia, Argentina, Brazil, Central America and the Caribbean," says Getulio Centanaro, Vice President Sales for Aeroméxico Cargo.

Connectivity and AI

Connectivity in logistics operations did not emerge because of the pandemic but it was significantly accelerated. BCG pointed out in 2018 that ports were already getting smarter and more digital. It added that opportunities remained. "Despite the improvements, aspects of port operations remain firmly anchored in the past, dependent on manual and paper-based systems," wrote the firm. That being said, the company was confident that technology would drive innovation. "Startups, suppliers and even customers are using digital technologies to develop a variety of innovative business models that will dramatically improve the customer experience and eliminate entrenched operational inefficiencies."

As the pandemic ground production operations to a halt across different sectors, companies became financially distressed. In the pursuit of savings, new technologies were and remain key to increasing efficiency. "Companies now have an interest in reducing their operational footprint, especially when they have to make space on their balance sheets for additional expenses attributed to the pandemic’s health and safety protocols. Companies like ours are restructuring the approach to engineering, design principals and cost reductions," said Rodolfo Alfonso Esquivel, Director General of Grupo Roales, a regional leader focused on supply-chain services, specifically outsourcing, project management consulting and offshore catering.

Incorporating new systems can have significant implications for operational efficiency. For instance, KPMG recently updated its supply chain predictor software that uses AI to develop predictive analytics to foresee potential disruptions. This provides real-time oversight of supply management. "The objective is a granular level of visibility into exactly where value is made, lost or exposed to potential risk throughout the entire supply chain," states the company. This level of visibility, whether through KPMG’s or other software, ensures better decision-making, said Ingo Babrikowski, CEO of Estafeta. "Thanks to technology, we can generate the necessary solutions that clients demand. We can redesign routes, calculate the levels and generate the services they require. Today logistics companies are information companies as well," he wrote for MBN.

One sector that has been a key recipient of logistics technology in the Mexican market, especially amid the global pandemic, has been the healthcare industry. "Our system is unique in Mexico and has gained us recognition from healthcare authorities. A computer system receives orders from each medical facility and it delivers the products needed, prioritizing those that are close to expiring. This is a modular system that allows for better storage capacity," said Javier Calero, Commercial Vice President of GNK Logistica, a company that is focused on the pharmaceutical industry and with several patents for tracing technology.

But incorporating new systems into a company's operations demands strong guidance from the company itself. According to Alejandro López, Director General of Grupo TM, "it is always important that the IT area of the company is involved in the development of applications around Radical Precision Engineering (RPE) or other interfaces to connect with customers. It is extremely costly and complex to delegate this responsibility to a third party and not have it within the company," he warns.

Self-Storage Boost

The pandemic considerably accelerated the digitalization of the digital economy in Mexico, as well. The market value of e-commerce in Mexico spiked to estimates of MX$864 billion (US$42.8 million) in market value in 2020, a 36 percent increase against 2019, according to Statista. Now, e-commerce is not only about Amazon, Mercado Libre and other large digital marketplaces. SMEs have also taken advantage of social platforms to ramp up their business.

For these companies, efficient logistics operations are essential, especially in large cities, and self-storage has become a feasible solution for last-mile deliveries. "Our added value comes from our strategic location within major cities, particularly Mexico City, close to high-demand and high-consumption areas for e-commerce platforms and individuals looking for additional storage space," says Diego Ysita, CEO of U-Storage, the company leading this segment in Mexico.

According to the 2020 Self-Storage Almanac, while in the US there are 158.8 million m2 of self-storage space, in Mexico there are just 256,000 m2.  The self-storage concept is simple: you get the space you need, for as long as you need it, with 24/7 access. As self-storage expanded during the pandemic because of the need for flexible storage spaces rather than large warehouses in the middle of nowhere, this segment is expected to continue growing in the coming years.

Environmental Concerns

Logistics players also are dealing with a longer list of requirements from clients to eliminate any  potential threat to the environment from operations. "This year represented a test for us as managers of environmental compliance. Recently, we began overseeing all aspects of the containers’ logistical cycle, from their use on platforms to their transportation to onshore waste treatment facilities where their contents are dumped and processed safely," says Emmanuel Montaño, Director General of Consorcio EMCRO, a Mexico City-based manufacturer and leaser of certified steel containers for the oil and gas industry. It also builds plants and provides related services for waste processing.

Grupo TM’s López agrees: "Safety and care for the environment are definitely trends and needs in the industry. Now, clients make sure that the (logistics) company complies with all regulations and that it has a structured Corporate Social Responsibility (CSR) policy."

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Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst