‘It’s about survival’
Companies increase storage, reconsider supply chains
For years, Soslan Tsoutsiev has counted on a Vietnamese factory to manufacture the bulk of his Montreal- based furniture business’s products.
Each week, 600 workers at the overseas operation make enough tables and benches out of Canadian wood to fill 60 per cent of the company’s orders, sending 20 shipping containers of products back to Tsoutsiev’s North American customers.
It’s a flow and exchange that has rarely let him down.
“We have inventory there, inventory here and inventory in transit,” said the chief executive of Transformer Tables. “It’s worked.”
Yet this year, with sales to homebound Canadians soaring and revenue on track to hit up to $ 50 million at the four- yearold company, Tsoutsiev plans to move all production to his factory in Dorval, Que., where 22 employees lean on extensive automation to meet the remaining 40 per cent of demand.
The way he sees it, the local operation carries a range of long- standing advantages — quicker delivery, more control over quality, proximity to raw materials — and one novel one.
“Machines don’t get sick,” Tsoutsiev said. “Not all challenges disappear, don’t get me wrong, but I just feel like we have more control here.”
Following unprecedented disruption to transportation channels and production due to COVID-19, retailers and manufacturers are rethinking the resilience of global supply chains and, in some cases, the wisdom of relying on foreign suppliers and manufacturing in exchange for lower costs, particularly for the just- in- time model that began in the 1970s.
Despite international efforts to keep supply lines operating as normally as possible, the global flow of goods across borders fell 4.3 per cent in March compared to the same month a year earlier, the steepest decline since 2009, according to CPB Netherlands Bureau for Economic Policy Analysis.
Even as countries ease restrictions on business, those declines are expected to deepen: the
World Trade Organization projects a further drop of between 13 per cent and 32 per cent this year.
What’s still unknown is whether COVID-19 will generate a temporary or enduring shift in global commerce, one in which complex global supply chains are unravelled and production brought closer to home.
“There is no company in any line of business that isn’t reconsidering things after this,” said Ryan Greer, a senior director at the Canadian Chamber of Commerce. “But right now, they’re thinking about the next six months. It’s about survival. Whether that becomes a permanent shift I don’t know.”
How companies do or don’t reimagine their business models could have a profound effect on factors ranging from production and shipping to industrial real estate as nervous companies could keep larger inventories of finished products and inputs on hand in case of shutdowns.
For Tsoutsiev, moving all production to Dorval will mean cutting out a full month of shipping time, allowing him to deliver his products more quickly to market. Automation at the plant will also provide an opportunity to rapidly scale up production to match any rise in sales.
It takes about 55 human hours to create one of his products at the factory in Vietnam. At the Dorval plant, it takes just four hours: two by humans and two by machines. The cost is about the same.
“The trouble has always been being competitive on labour,” Tsoutsiev said. “In Canada, it is so expensive compared to Vietnam. The answer for us has been automation and we’ve almost got it to where we need it now. With that, we can make ( products) as cheaply here as there.”
Other changes are also afoot. Half of the Dorval factory’s 30,000 square feet is currently devoted to finished product storage, with about 5,000 square feet used as office space and the rest devoted to production.
With scores of retailers still closed and more consumers moving to e- commerce, Tsoutsiev plans to redeploy a significant portion of the existing offices as warehousing space, allowing for a greater cushion against potential production disruptions.
To further ensure speed to market, he will also ask his Canadian wood suppliers to keep a larger inventory of his key raw material on hand.
What’s more, though the Vietnam factory has yet to experience an outbreak of the virus, he likes the idea of keeping infection prevention in-house. Dorval employees have been outfitted with masks and other protective equipment, social distancing rules are in place and door handles have been removed to limit transmission.
“COVID obviously took everyone by surprise, not just our business, but also the people we work with,” Tsoutsiev said. “One person gets sick and everyone goes home. Nothing is totally corona- proof and we’re looking at measures in Vietnam, too, but, obviously, I think we have more control here.”
The pandemic has expanded an already fierce appetite for industrial properties including warehouses. Indeed, inadequate supplies to meet the sudden surge in demand for goods bought online meant typical two- day delivery times from companies such as Amazon. com Inc. were lengthened to weeks.
“Especially for food companies, consumer products and anyone e- commerce focused, that happened right out of the gate,” said Kyle Hanna, executive vice- president at CBRE Canada. “Traditional inventories of 90 days’ worth of products are going to five or six months. The biggest of the big e- commerce retailers have all taken more space in the last two to three months. They’ve grabbed temporary space and are in the process of securing more.”
Even as traditional retailers race to expand their web businesses, existing e- commerce giants are moving on properties beyond core markets such as the Greater Toronto Area and into secondary markets like Kitchener-waterloo, Ont., and Hamilton, he added.
“Amazon is the pioneer of all this, but I think we’ll see an arms race in the delivery of consumer goods,” Hanna said.
The competition for space will take place amid scarce supply. The vacancy rate for industrial real estate in the first quarter was 1.9 per cent in Vancouver, a market with 200 million square feet. In Toronto, a market with 800 million square feet of industrial space, it was 1.2 per cent.
Toronto rents, with so little supply available, have jumped to $ 9.55 per square foot from $ 4 a few years ago, according to CBRE.
“There was already a shortage of space, but now COVID has put construction on pause,” Hanna said. “It’s a market that will continue to be tight.”
Any supply chain transformation due to COVID-19 is unlikely to be uniform across industries, since moving production closer to home or shifting to “just in case” supply chains, where more inputs are kept readily available, is more complex for some companies than others.
For example, products such as cars rely on tens of thousands of parts from hundreds of suppliers, many of which operate outside North America. And not all companies will find the cost savings delivered by cheap foreign labour easy to replace.
Whether COVID-19 will push automakers to fundamentally shift just- in- time supply chains that cut costs on labour and reduce the need for storage “is difficult to say beyond the short term,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.
“The trend will be to de- risk the supply chain, but the price pressures that drive low-cost procurement have not disappeared,” he said.
Nor have fears about what a renewed shutdown due to a second wave of infections could do to businesses and the supply chains that support them.
“Once the government support burns off, you’ll see the real carnage and we’ll have a better sense of where all this is headed,” Hanna said. “The problem now is we just don’t know.”