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August 17 2020

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August 17 2020 | The Journal of Commerce 31 www.joc.com Commentary Dean Tracy Ed Sands Kenneth O'Brien THE COVID-19 CRISIS couldn't have come at a worse time for interna- tional logistics. That's not because ocean carriers finally figured out how to eliminate sailings and prop up rates despite plummeting vol- umes. Nor is it because virtually all passenger plane belly freight capacity left the market, sending air freight rates and transport costs into the stratosphere. Those developments have been costly, but the real weaknesses that COVID-19 exposed in supply chains is more troubling for the long term. There has been a hollowing out of knowledge, experience, and relation - ships among companies and their logistics teams, accompanied by a shift toward a procurement mindset focused only on cutting costs. In international logistics, the seeds of the present disruptive moment were planted several years ago. Since the financial crisis of 2008, the rapid rise of e-commence and lightning-fast emergence of new brands and fast fashion have changed consumer expectations while accel - erating the — perhaps inevitable — decline of some of America's most iconic brands, particularly in the retail space. The introduction of new and increased tariffs on goods from China and elsewhere, as well as retaliatory measures abroad, has put additional financial pressure on many American shippers. During the early days of the COVID-19 crisis, there were news stories saying "supply chains are crumbling" and asking "where are the masks and ventilators?" Thoughts such as those are not isolated; they show the widespread ignorance of how global sourcing and supply chains really operate. Unfortunately, there is too often little understanding of the process infrastructure that makes up the "plumbing" of the global supply chain. As a result, we're seeing a repeat of a familiar history, wherein compa- nies often are forced to learn and invest in critical capabilities when they're at the brink, instead of mak- ing the necessary investments to be prepared in advance for managing normalcy. Regrettably, the C-suite focus in too many businesses on the effectiveness of their supply chains usually only occurs in times of crisis. When these events take place, logis- tics professionals are asked to step into the breach to answer for poor performance and lack of technology and data. Getting this right isn't easy and requires management to address fun- damental questions. Has COVID-19 exposed weak- nesses in your supply chain, and are you prepared to make the necessary investments in the people, platforms, and processes required for when the next black swan event interrupts our lives and businesses? The right balance A critical component of supply chain excellence is striking the right balance between outsourcing logistics functions and building excellence internally. Partnering with a third- or fourth-party logistics provider to manage your operational activities is an essential element of a supply chain strategy. However, it is particularly important to strike the right balance of cost, service, risk management, and accountability to execute that strategy. In making these decisions, it's imperative that internal decision- makers and the outsourced vendors have a strong operational capability, but they also need a deep knowl- edge in your company's operational requirements. They must be onboard with the objectives of the business in order to be successful. Without that intimate operational knowledge of the end-to-end process — the plumbing — stakeholders on both sides will not be able to meet their commitments. Human capital Human capital in logistics provides today's leading compa- nies an incredible edge over their competitors. The knowledge of how to execute a strong logistics strategy cannot reside solely in third-party suppliers who are externally located. In addition to developing the talent to succeed, we need to teach our next logistics leaders how to sell their value internally. What we have witnessed over the past 10-plus years is a gradual hollow - ing out of the logistics talent across many companies, which has left them vulnerable and will take several gen- erations to rebuild. Procurement and performance Procurement excellence and ser- vice-level performance must go hand in hand. Many companies have moved the strategic decisions on a supplier selection to a procurement strategy optimized to deliver a short-term cost benefit. What works for commodity categories doesn't always apply to more intangible areas such as trans- portation and logistics services. Procurement strategies too often put critical nodes of your supply chain at risk. The positive quick-win earnings before interest and taxes (EBIT) impact of a reduction in operating costs is too often confronted with the fast-moving marketplace and an increasingly disruptive global economy. When a pandemic such as COVID-19 or another black swan event such as a volcanic eruption in Iceland strikes, companies are left to scramble for capacity to move their products and ensure their supply chain does not collapse. Nobody goes to the procurement department for a logistics strategy, as the reduction in price can be far out- weighed by the cost of a solid strategy that considers all the links and nodes in the supply chain. JOC Dean Tracy is executive vice president and chief operating officer at RCS Logistics; Ed Sands is a retired principal director at Accenture; and Kenneth O'Brien is chief operating officer of Gemini Shippers Group. Losing the logistics edge

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