If the watchword of 2020 was “uncertainty,” the term of 2021 will be “adaptability.”
As economies recover, some sectors will see a return to pre-2020 operation. But for procurement teams, adjusting to the “new normal” will take some time.
Everywhere you look, supply lines have been disrupted. Airlines and hotels are operating at reduced capacity. Retail stores are closing physical locations and building their e-commerce operations. Grocery stores have limited quantities of cleaning supplies, meats, and canned goods. Many businesses — big and small, young and established — are closing their doors for good.
In a few industries, such as travel, costs will go down due to decreased demand. In most sectors, however, sanitization needs and supplier failures will drive costs up. More companies will turn to group purchasing organizations to strengthen their supply lines.
What does all this mean for your operations? How your procurement costs and challenges shift will depend on how these five trends play out:
1. Covid-19 Vaccine Development and Distribution
During Covid-19 lockdowns, international shipping fell off a cliff. When and how freely trade returns depends on when a Covid-19 vaccine is developed and distributed.
If a vaccine is delayed, e-commerce will continue to be the name of the game. Most orders will be transported by ground, which is generally less risky than air or sea.
Airline shipping capacities decreased in 2020 and will be slow to recover in 2021. Airfreight costs have increased making it nonviable for many small suppliers. And because fewer seafaring barges are running, these costs have increased as well.
While trucking industry operations slowed in 2020, some experts believe that 2021 will be a banner year for ground freight operators. Already, most intrastate goods are transported by truck, and industrial decentralization may accelerate this trend.
Once a vaccine for COVID-19 is ready for shipment, it will require cold shipping containers. The total demand for a cold chain may outpace the available supply. Grocers and foodservice companies may struggle to find transportation for their supplies.
2. Recovering Manufacturing Operations
Large manufacturers took heavy hits working to keep production lines open. The recovery in 2021 is likely to be slow but steady.
Some plants, such as meat processing facilities, became COVID-19 hotspots. The Food & Environment Reporting Network (FERN) reports that, between April and October, over 71,300 employees in farms, food processing and meatpacking companies tested positive for COVID-19.
Other manufacturers faced similar hardships. They are preparing for increased winter infection rates as 2020 draws to a close. If too many workers call in sick, they may shut down again.
As 2021 begins, backorders on manufactured goods will be common. Plants will slowly dig themselves out as the economy improves. Vacancies will be filled by new workers.
Between new hires and regulatory changes, this is likely to be expensive. Manufactured goods will probably increase in price. The laws of supply and demand suggest suppliers won’t need to offer discounts to bring in business. For companies at the end of the value chain, growing use of GPOs may offset this to a degree.
3. Regulatory Changes and Limited Waivers
To help industries and consumers weather the pandemic, the federal government eased some safety restrictions. For example, it approved a waiver that allows some impurities in alcohol-based hand sanitizers.
This allowed alcoholic beverage companies to jump in, increasing supply levels. But in some markets, alcoholic beverage prices rose because supply levels fell as demand grew.
Expect to see the federal government grant other sectors a similar amount of flexibility. Beware that the downstream consequences of regulatory changes can be complex.
Say worker shortages continue to affect meat processing facilities. Federal regulators may relax labeling requirements. If so, consumers may react with caution, turning a shortage into a glut. Or, there may be a rebound, given that consumers have had less access to meat in recent months.
Remember, that’s just one scenario in one industry. Throughout 2021, procurement specialists will need to keep an eye on the status and market consequences of waivers.
4. Artificial Intelligence and Just-in-Time Inventory
While it’s not the most exciting application of artificial intelligence, AI is changing the procurement sector more than most. Machine learning is creating efficiencies and identifying excess supply levels.
For example, Amazon is using AI to power one-hour deliveries. Software can predict order volumes and deliver supplies to warehouses before they’re ever purchased by consumers.
With this technology, the question isn’t whether it works, but how widely it’s adopted. Will procurement teams feel confident enough to make tech investments while the market recovers? Will AI systems accurately predict supply needs during atypical times like these?
Frankly, this trend is tough to read. On one hand, investments in technology tend to accelerate during economic downturns. On the other, companies may be hesitant to invest in a model trained on “normal” economic conditions.
5. U.S.-Chinese Relations
In early 2020, China was dealing with its COVID-19 outbreak. Some Chinese manufacturing operations dropped to half capacity, causing shipping delays for nearly two-thirds of American companies. Since then, U.S.-China relations have been even tenser than normal.
Looking ahead into 2021, procurement specialists need to keep a pulse on U.S.-China relations. New tariffs and border closures may stop up international supply lines. If relations improve, increased trade could boost supply levels and decrease prices.
The bottom line is, procurement professionals can expect more turbulence in 2021. The best-case scenario is that a vaccine is developed and deployed quickly, improving supply levels and reducing international travel restrictions.
In the worst-case scenario, a vaccine may not be available until late in 2021 or even the year after. Chinese-U.S. tensions may continue to worsen, hampering both countries’ economies. If so, consumers and companies are both likely to clamp down on spending.
Regardless, supply lines will resume slowly but surely. As they do, procurement leaders will need to shift their spending and develop new relationships to stay competitive.