UPS and Prologis executive leaders highlight logistics challenges amid the pandemic

A keynote session at the “Groundbreakers 2021: Breaking New Ground” conference hosted by San Francisco-based real estate investment trust company Prologis this week touched upon both the pain points and the opportunities that the Covid-19 pandemic has created for the supply chain.

The session featured Prologis CEO Hamid Moghadam and Carol Tomé, CEO of Atlanta-based global transportation and logistics bellwether UPS, two leading industry executives. And they both talked about the impact of the ongoing global supply chain issues on their respective companies.

Tomé said that UPS delivers small packages to 2% of the world’s GDP and 6% of the United States’ GDP on a daily basis, but the pandemic, she said, brought about a steep change in demand.

“We were flooded with volume that we did not expect to see until 2023,” said Tomé. “A year ago, we had to hire 40,000 people into our network to handle that demand, in the face of Covid and keeping everyone safe. The supply chain issues are real. If you go upstream, not downstream, which is where we play, from raw materials to manufacturer, with so much of that outside the U.S. and then flowing into the U.S., you see [things] really jammed up.”

As an example, she pointed to how UPS has hubs at Port of Los Angeles (POLA) and the Port of Long Beach (POLB), which collectively account for roughly 40% of United States-bound imports, with these hubs ready to take in containers that are drop-shipped and delivered to UPS by a third-party.

“Today, we are only at about 70% of capacity of what we could take, because there are not any drivers to drive the containers from the ports to our hubs,” she said. “It is all hands on deck to get more people driving [trucks] to get those containers moving out of the ports and into the hubs so those packages can be delivered.”   

Prologis’s Moghadam said that supply chain pain points are everywhere, explaining that his company is in the tough position of trying to meet the demand of its customers and is working around the clock to do that.

“We are working on bringing on new capacity, because I think this new world is going to require a lot more inventory along the system,” he said. “Along with how demand increased very quickly, there is another thing going on: supply got disrupted at the beginning of Covid.

He likened that scenario to filling up a hose from the manufacturer to the consumer, noting it takes a long time for the hose to fill up and the water to come out the other end.

“That is the challenge, and, unfortunately, these kinds of capacities, which cannot come on instantaneously, take time and you need to buy land and buildings,” he said.

As for Prologis, though, he said the company is in a fortunate situation, in that it has incredibly large and well-located land banks, so it can build another $20 billion worth of real estate based on what it has. But that alone, he added, will not do the trick, as this current problem is likely to be lasting for a while.  

Addressing the current supply chain issues, which have subsequently become headline news, Moghadam observed that it was driven by demand coming back much more quickly than was anticipated.

“Demand came back with a vengeance, but the employees didn’t,” he said. “That is where the problem is. It is tough to get the capacity to handle all of the demand. People were sitting around at home and not travelling, and cash was building up in their bank accounts. And all of the sudden they were flush and want to have a great Christmas after two years of being cooped up. Pretty much everything that could go wrong or right happened at the same time.”  

Looking at how the uptick in demand significantly altered basic supply chain fundamentals, Tomé noted how many manufacturers shifted to a just-in-time inventory model, which worked well prior to the pandemic and was very effective.

“But when the pandemic hit and everything shut down, including manufacturing, coupled with the economy later re-opening and demand increasing, that [model] did not work anymore,” she said. “What companies are thinking about now is needing just-in-case inventory. I suspect what we are going to see around the world is that working capital models are going to change pretty dramatically, which is great for Prologis but you are going to need space for all of that stocking of inventory and making sure companies don’t run out of [inventory] again.”

This situation has led to a big wake-up call, according to Tomé, with myriad companies focusing on their risk management programs to prepare for whatever comes their way, whether it is a pandemic or a cyberattack, or something else.

“None of us went through this table exercise of what would happen if a worldwide pandemic occurs,” she said. “We have now changed our whole approach to risk management and are really thinking about those Black Swan events and those events that none of us think could happen, because we have learned that they do and you have to be ready to act.”

When looking at what happens next and how long the current supply chain issues will remain intact, neither executive minced their words.

Tomé said that things will not clear up for a while, given the existing demand-capacity imbalance.

“As we head into the holiday season here in the U.S., I think about the demand versus the capacity…there will be demand for 5 million packages per day more than the total capacity [of all providers] in the small package network,” he said. “My advice to anyone in holiday shopping mode: shop early and get your holiday gifts purchased now!”

And Moghadam said if he was to pick a date, for when things could return to something more normal, he pegged the middle-to-end of 2023.

“I actually think it is going to get worse, because a lot of people already talking about the logjam over Christmas are going to experience it,” he said. “They are going to change their consumer habits and we don’t know quite how. There could be the toilet paper issue like there was before, which affects demand in unpredictable ways. The short-term problem, I think, is going to be with us through 2023 almost. The longer-term issue is really what our company is focused on and that is how do we bring on capacity in places where people are? It is pretty easy to bring on capacity in the middle of the country where there are no consumers. But [in major metropolitan areas] how do you build these facilities that are going to hold all of this inventory and is going to insulate us from these shocks?”

Those shocks, he added, are not just pandemic-based, as they also include weather events during the same period, and the Suez Canal blockage, among others, which have made the world less predictable. And the unpredictable nature of things brings about the need for 10%-to-15% more inventory in the supply chain, which requires a commensurate number of buildings, or more efficiency through buildings, and that takes a long time to get delivered.”