COVID 19: Retail and Supply Chain Implications

First, can you tell us a little about your background and your role at SSI SCHAEFER? And the impact of COVID-19 on your company?

I studied electrical engineering but have spent virtually all of my career, about 40 years now, in automation.  For the last 25 years I have been involved in automated systems for warehousing and distribution.  I have been the Country Manager of SSI SCHAEFER in Australia for just over 10 years now.  SSI SCHAEFER is a world leader in fitting out warehouses, from static pallet racking and storage solutions through to very sophisticated automated order fulfilment systems using conveyors, robotics and bespoke software.  

We have seen tremendous growth in our business, both in Australia and globally, and generally we consider ourselves to be in a growth industry.  Whilst manufacturing has been automating for forty years or more, automation in warehousing and distribution is still relatively young.  Companies are increasingly aware that while they may have their production costs under control, many of their mechanisms for storing inventory and for picking, packing and delivering orders to customers can still be slow and labour intensive.  And this is being exacerbated by the push to on-line shopping.  They are therefore looking to companies like SSI SCHAEFER to not only help improve their productivity and space utilisation in the warehouse, but also to improve the speed and quality of their deliveries.
COVID-19 has impacted our business.  However, I have to say, we are generally better off than many. 

Whilst we have seen some of our customers defer investments, we have seen others forging ahead with new investments.  And whilst some of the projects we are currently implementing have been delayed due to factory closures overseas, none has been suspended or cancelled.  Because we are essentially a project company, and our projects run from 6 months to 2 years, and we have a good backlog of work, we are not anticipating a significant impact to our business in 2020, and we can be very grateful for that.  We also have a great team of dedicated and adaptable staff who are always committed to delivering the best outcome for our customers and who have quickly found alternative solutions to continue to meet expectations when COVID hurdles have appeared.  Whether our business is later affected by the potential recessionary hangover from COVID remains to be seen, but for the moment things look OK for SSI SCHAEFER.  

COVID-19 has affected just about every aspect of our economy and society. Can you outline the main supply chain and automation implications?

The effects of COVID on the Australian supply chain have varied dramatically from industry to industry.  We have seen massive unplanned peaks in demand, particularly for groceries and pharmaceuticals, which have put enormous strains on the supply chain.

We have seen other companies, for example clothing and fashion, that have experienced a drop in overall demand due to store closures, but a massive increase in online sales.  Fulfilling online orders is very different and more difficult than fulfilling store orders, so this has brought new and different challenges to these companies.

We have also seen a direct drop in demand in other industries, for example the beverage industry, where they have simply had to wind back their operations, mainly due to pub/club and restaurant closures.

Generally, however, I think we are fortunate in Australia in a number of ways:

We have not been forced to shut down production plants, distribution centres or construction sites, and we have also been able to continue to receive and ship overseas goods.  I appreciate some factories have shut down where demand for their products has fallen significantly, but that is really a commercial decision, whereas we have seen factories overseas, for example in Malaysia, forced to close down due to the COVID situation, even though they have full order books.  Yes, the shutdown of overseas factories does also impact our supply chain, but more in the form of delivery delays.  
I think it is significant that in Australia, where the demand still exists, we have been able to continue to manufacture, distribute, build, import and export.  And we have been able to do this safely by companies quickly adapting their operations to mitigate the COVID risks, which is testimony to our well-established safety culture, as well as our flexibility and adaptability as a nation.

Additionally, the government assistance programs have managed to avoid a complete collapse in consumer demand.  While stores are mostly closed, we have seen a massive jump in e-commerce, which has created new challenges for the supply chain, but at least we are trading.

Finally, I think we have generally managed the crisis well as a nation, in that we have been able to really limit the spread of the virus, which will allow us to get back to normality quicker.  The key point here is confidence.  If people can see light at the end of the tunnel, they are more likely to continue to spend money, which is key to the recovery of the economy.

Coming back to the implications on supply chain and automation, I have already alluded to a few key factors.

The first aspect is the rapid and unforeseen change in demand, both up and down.  We saw demand in the grocery and pharma industries in particular jump unexpectedly by around 50%, which put enormous pressure on their supply chain over many weeks.  This severely tested existing systems and operations, with varying outcomes.  For some companies, it showed what their distribution systems and operations are capable of, which gives them confidence to pursue more customers and additional volumes through their existing infrastructure in the future.  For other companies, it highlighted the limitations of their current systems.  

I think the lasting lesson is about the need to build in flexibility.  Automation is important for being able to productively deal with high volumes, however it is important not to forget that highly automated systems tend to have a finite throughput capacity. They can be operated for longer hours during peak times, but it is prudent to also develop strategies that build in the flexibility to meet suddenly changing demands.  

The second COVID aspect is the sudden increase in demand in online fulfilment.  While front-end websites may easily cope with a sudden increase in online orders, the distribution centres may not.  Fulfilling online orders is far more difficult than fulfilling store orders for a number of different reasons:
•    Online orders are generally small – 1 to 3 individual items – this makes them more time consuming and less efficient to pick, compared to say sending a couple of full cases to a store
•    Most online orders have special packing requirements – the out-of-box experience is important.  Instead of simply sending a carton to a store, the items need to be carefully packed, perhaps gift wrapped, perhaps with a special message.  In some online operations, the labour required for packing can be higher than the labour required for picking.
•    The response time to pick, pack and deliver online orders is much more onerous.  Online orders should ideally be picked and despatched same or next day, whereas stores may be replenished only once a week.
•    Online demand is far more variable and unpredictable than stores demand, e.g. Mondays may have to deal with all of the weekend orders, Christmas, Easter, back-to-school, Black Friday, all generate sudden and massive peaks in demand, not to mention COVID.

And, unlike the panic buying peaks, this move to online has not abated.  I think one of the lasting effects of COVID will be a generally higher level of e-commerce (and of working from home).  This will continue to put further pressure on companies to install smart and flexible fulfilment systems for dealing with this now even faster growing trend. 

According to David Simchi-Levi, a thought leader in supply chain management, companies have, in addition to offshoring, emphasised “just in time” delivery, keeping only 15 to 30 days of products on hand. That has made global companies more profitable but has also significantly increased supply-chain risk. How do you think the logistics industry will try and counteract this vulnerability in the future? (will this affect production?)

Yes, there is a general trend in the supply chain towards a higher variety of products, reduced inventory, and more frequent smaller orders.  Since store shelf space is precious, retailers would like to face as many products as possible to the customer, which means less inventory of each product in the store.  This in turn means that stores need to be replenished more often in smaller quantities.  This necessarily creates more work at the distribution centre, because smaller orders must be picked from a wider range of products.  This is further exacerbated by the trend to online orders.
This trend to smaller more frequent deliveries is driving a lot of automation in the supply chain to reduce the amount of labour required to fulfil orders.  But as you mentioned, this trend also increases the risk.  Essentially, less inventory is being held throughout the supply chain and the speed of the flow of goods is much higher.  This makes the supply chain much more vulnerable to disturbances.  In respect of automation, this means that reliability is absolutely a top priority. Even a stoppage of a few hours in the distribution centre can mean an empty shelf at a store which in turn translates into a lost sale.  It is therefore essential that automated systems are well supported and maintained, with guaranteed repair reaction times 24/7, and key spare parts always at hand.  This is a key focus for SSI SCHAEFER and two thirds of our staff are directly involved in ensuring the ongoing trouble-free operation of our customers’ systems.

With your experience of having worked in Germany, and SSI SCHAEFER being a German company, how would you describe the main differences between Australia & Germany?

That is a big question as obviously there a lot of differences from a cultural and climate point of view, but also, I think business in Germany is quite different to Australia.  Germany is a powerhouse of manufacturing, whereas Australia’s manufacturing industry has continued to dwindle. The backbone of Germany is of course the “Mittelstand”, which is characterised by many mid-sized companies and a lot of these are private family companies.  Actually SSI SCHAEFER, although it is a global company with 10,000 employees, is a private family company as well.

I think this predominance of the Mittelstand shapes a lot of the decision-making which sees German companies generally take a longer-term view.  SSI SCHAEFER is also a manufacturing company, as we make all of our equipment.  When SCHAEFER decides on an investment, in say automating one of its factories, it does so with focus on the long-term profitability, not on the short-term share price.  
Moreover, I find German companies tend to be more conservative and are looking for ongoing steady growth, rather than a meteoric rise.  It is therefore not unusual for German companies to accept a 10-year payback for an investment in automation, whereas in Australia the horizons tend to be a lot shorter.

While Australia has a very different economy, based largely in mining, tourism and services, I think Australian businesses are perhaps more flexible and adaptable.  I have heard it said that Europe is very “change resistant”, which of course is part of its charm, but it also means slower to adapt.  Australia on the other hand is a very flexible and adaptable country.  This should not be a surprise, as after all, much of our population is made up of immigrants, and only the most flexible and adaptable people leave their homeland to start a new life at “the other end of the world”.  So Australian companies may have a higher expectation in terms of short-term growth and profitability, but I also think we have a very flexible and innovative population, with the ability to adapt to changing circumstances; for example, COVID.

With a huge increase in online shopping since the start of the COVID-19 crisis, where do you see opportunities for the industry?

With the huge increase in online shopping comes both opportunities and challenges.  As a potentially new group of customers has suddenly become more comfortable with online ordering and contactless deliveries, and appreciate the convenience of it, I think the increased demand in online shopping is unlikely to recede to previous levels.  It was already growing at an unprecedented rate but COVID has definitely given it more impetus.  

The greatest opportunity will be for the suppliers who can deliver quickly with good quality.  Consumers are looking for a reliable and trustworthy service, but it is also important that suppliers are able to fulfil orders economically.  For suppliers with an already uneconomic fulfilment operation, a jump in orders is not necessarily helpful.  

Most companies that have stores, also have a parallel online operation.  Often online is approached as a separate business and the fulfilment of online orders is carried out quite separately from that of store orders, possibly from stores, or from a separate facility, or through a third party logistics provider.  When starting out, this can be a good approach, but over time, as the online business grows, it makes sense to take an integrated approach and fulfil both types of orders from the same facility.

I see great opportunities for companies who can efficiently and productively fulfil online and store orders out of the one facility, including significant savings in inventory and overheads.  To do this requires again a very flexible system, as we have discussed earlier, however with the right application of automation and design of processes, this can be achieved.

Which advice would you give businesses that are new to ecommerce, or have struggled to keep up with the demand?

Again, I think flexibility is the key.  Because of the inordinately high peaks and the totally unpredictable growth rates, it is important to ensure any online order fulfilment operation is both economical and scalable.  Where an online fulfilment operation which is not scalable is suddenly inundated with orders, the result is often a melee of people in the warehouse, struggling to get orders out the door.  

However, with thorough planning, which considers seasonal peaks and high growth, flexible system designs, which allow easy expansion of storage and throughput, and robust processes, facilities can be created that will economically scale to changes in demand.  Companies that embrace these principles have the opportunity to build a reliable and trusted platform for online fulfilment, enabling them to take market share from their competitors and sustain profitability.

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