William McKinnon is the president of Canadian Alliance and is an expert on data-driven supply chain management. In this interview, William shares his insights on rapidly shifting supply chain outlooks in light of the COVID-19 pandemic.
Panic buying is on the decline, but many store shelves remain empty. How has the food supply chain outlook changed since we last spoke?
William McKinnon: Store shelves are empty because our customers have not been able to replenish products into their supply chain at source. There is a lag between ramping up inventory to meet demand and what has already sold out. The net result is that the inventory levels of many of our customers are at historic lows.
These levels are around 60% of what would normally be kept on hand. Subsequently, some products are seeing a complete stock-out, and manufacturers don’t necessarily have the ability to meet customers’ orders on a demand basis. On our end, as a result, we’re seeing our customers rationing inventory between their customers.
How are these manufacturers forecasting?
WM: We do a lot of work in the food industry, and a lot of the product we work with is derived from natural resources—think product that is grown or fished in other parts of the world, for example. To suddenly accelerate production in this realm is very difficult because, naturally, crops are not designed for this sort of surge in demand.
If this surge continued over years, producers would react accordingly to meet demand, but that’s not happening right now. There is a finite amount of inventory out there and large portions of that inventory are being consumed throughout the food chain.
This means warehouses are operating with very low stock margins.
WM: Exactly. They’re trying to satisfy all of their customers—instead of giving all of their product to one customer, they’re dividing it up among several, which I think is the responsible thing to do. This ensures a wider distribution of product to people and companies who need it.
What about medical chemicals and supplies?
WM: Most sanitation chemicals that we handle are primarily sourced within North America and that production has, to a certain extent, been able to keep pace with demand. Inventory levels are down, but they are in a much better position to scale up.
What about unexpected manufacturers, like breweries or hockey companies, contributing to medical devices and accessory supply chains?
WM: We haven’t seen any evidence of our customers using what we would consider substitute products. Most of them are global brands that have very high standards for sourcing; behind the scenes they may be making those substitutions, but when products arrive in our facility, it’s still branded by those companies.
Companies like Ford and General Motors have been tasked with manufacturing large numbers of ventilators to aid in the COVID-19 crisis. How can this be executed if those companies don’t have pre-existing supply chain agreements for these types of products, especially when providers such as Canadian Alliance are already at capacity?
WM: I think it’s difficult. We’ve seen provincial governments stepping in and seeking to manage the supply chain. But to speak candidly, I think there are experts better suited to this task than provincial governments—the private sector has a proven track record of excellent management of the supply chain.
It’s a question of diversion. How do we divert resources in a time of need? In the case of automotive producers becoming involved with the manufacturing of a product like ventilators, it can definitely be done. They surely have the resources. But the big question remains: who is going to pay for that pivot in manufacturing?
In the US recently, there was discussion between the federal government and General Motors pertaining to General Motors’ flexibility on this issue. My sense is that General Motors could pivot resources into producing ventilators, but there needs to be a business case for them to suddenly invest millions of dollars to assist in the production of medical devices or accessories.
This is the rub: I don’t know that all governments truly understand the amount of capital required to shift a business. It’s huge.
What’s the best news coming out of the food and medical supply chain?
WM: I think the best news coming out of this crisis is that companies are proving themselves responsible. They are ramping up production to service their customers and meet demand. In Canada, we are absolutely going to deal with this virus in the most efficient manner that we can manage; so far, I think we’re doing very well.
I also think the accepted standards of public hygiene are going to become much more stringent, and that will affect the corporate world as well.
From the perspective of your customers, how have their day-to-day operations changed? Is there any advice that you can offer as a logistics consultant?
WM: That’s a good question. With our customers, we’re first working to really understand their short-term forecast planning—what does that look like? And how do we adjust business staffing levels to match that forecast?
We used to operate on an ad hoc basis, taking orders and racking accordingly. Now we’re starting to plan ahead, because our customers are really concerned about disruption in the supply chain and their stocking levels. Consequently, we are having more dialogue with our customers than we ever have, which I think is really positive.
What does that planning look like?
WM: I was just speaking with a customer this morning, actually, working out this sort of plan. Today is only April 1st, but we’re already thinking ahead to the end of May. What will your business look like at the end of May? What decisions are you making today, and what decisions will you need to make two months from now, that will drive more volume into your supply chain?
I really want to know these things. I want to understand what is coming down the pipeline, both in terms of space and staffing, so we can best service our customers.
Are you receiving information from stockists regarding their expected capacity needs?
WM: Well, there’s been a bit of a shift. In the past, orders would be placed directly into the grocery channel distribution centres. But now, we’re actually seeing smaller orders placed direct-to-store due to the critical timeliness of those orders.
Going direct-to-store in smaller quantities means that product can be placed within one or two days. Conversely, if you route through the distribution centre, that extends the supply chain journey to about four days.
I noticed this trend yesterday in one of our facilities—we’ve got pallets of multiple products going directly to grocers. It’ll arrive in the store, be stocked that night, and be sold out the next morning.
What can your customers expect in terms of price fluctuations and service availability?
WM: We haven’t seen any real change in pricing at this point, but we’re not in a place to adjust our pricing like the grocery channel does. When they have high demand, their margins go up. It’s very simple. So, the grocery channel will make a lot more money this quarter than they ever have.
To date, we haven’t used surge pricing in our business. We don’t charge a premium if our customers’ volumes increase above a certain level. However, in the future, I think you’ll start to see many third-party logistic services with surge pricing, including Canadian Alliance. It seems to be a measure we will need to put in place.
So today, customers can expect a stable pricing structure, but in the future, we should expect to see that change.
WM: Exactly. Today, it’s business as usual. We’re charging our customers what we always charge. In situations where we have extra volume, we’re covering that with overtime. Our goal is just to keep our customers in business.
If someone was looking for supply chain services now, what would you recommend to them?
WM: I’d say get on the phone with a reputable company with capacity to grow. We’re onboarding new customers right now—from our point of view, it’s business as usual.
We’ve also had customers that are ceasing work with facilities that no longer accommodate their requirements, or they are putting it to us because it’s quicker. Because we’re good at it.
So, if a company is working to fill a sudden gap and they have a large inventory, they should just start working through the process as usual?
WM: Absolutely. We are onboarding three new customers over the next three weeks. Today we’re onboarding customers who have an immediate need to get products to market quickly. For us, it’s all about speed to market—we can help companies get products to their customers faster.
How has your perspective shifted in providing these services during the COVID-19 crisis?
WM: It is a very interesting time, without a doubt. I am so thankful that we are considered an essential service. This way, we can keep working to help our customers meet their customers’ requirements from a food perspective and a chemical sanitation perspective.
I feel very blessed that we are able to do this work. It pains me to hear about other businesses that are not able to remain open. Our mentality is a positive one: in the face of this adversity in the marketplace, we are performing a responsible service that is necessary to the livelihoods of Canadians. And that is incredibly important to us.