Boxes on shelves in a warehouse

You don’t have to look very hard to find an industry executive mentioning the term ‘supply chain.’ Indeed, during the first two weeks of October, the expression cropped up some 3,000 times on earnings calls hosted by S&P 500 companies. The problem – put simply – is that “the old ways worked until they didn’t”, as Hamid Moghadam, the Chief Executive of Prologis put it recently. To understand what needs to change, we were lucky enough to join recently an online symposium called “breaking new ground,” hosted by Prologis, but also featuring senior executives from DHL, Maersk and UPS as well as a member of the House of Representatives and the author Michael Lewis.

“It’s going to get worse” before it gets better was the sobering message Hamid shared with the audience. Prologis is arguably one of the businesses best placed to make such an assessment since around 2.5% of the world’s GDP flows annually through its warehouses. Most readers will be clearly aware that the pandemic led to an upsurge in demand for online purchases, but the problem is more systemic than that. Supply chains in general were always historically built to perfection, permitting for just-in-time delivery. What we’ve learned is that exogenous events – not just the pandemic, but also factors such as adverse weather and a grounded container ship in the Suez Canal earlier this year – can disrupt this set-up. Just-in-time will morph to just-in-case.

To get a sense of the current scale of the problem, consider that there are 540,000 containers waiting in harbour at the port of LA, the busiest port in America. Typically, only 18,000 get loaded daily. Viewed from a different perspective, further downstream in the supply chain, Carol Tomé, the Chief Executive of UPS told us that there is currently a daily excess demand of 5m packages in the US relative to available supply. Further, there is an apparent shortage of 80,000 truckers in the US at present.

Enough of the problems, what about the solutions? One speaker put it best by say it’s about “joining the dots.” What this means practically is developing end-to-end solutions that work across supply chains. Sure, building more warehouses relative to where demandis makes sense (as well as adding new storeys to existing ones), but if you’re doing so, then it makes sense to configure them with software that can enable (driverless) trucks to be loaded and unloaded using autonomous software packages. Make the trucks energy efficient (as well as the containers that bring the goods there in the first place) and you’re onto a winning formula. As Hamid puts it, we all need to have confidence “to do the impossible in a short period of time.”

4 November 2021

The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in Prologis. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.​​​​​​​​​​​​​​​​​​​​​

Alex Gunz, Fund Manager

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The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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