8 Ways to Cope with Supply Chain Madness
A few months ago, shippers were paying record ocean freight rates that were five to 10 times higher than pre-pandemic levels as the result of a capacity crunch and a global shortage of containers. Now Drewry estimates there is an excess of six million 20-foot metal shipping containers – known as TEUs – flooding the market.
The same wild imbalances pop up all across the supply chain. Shortages of semiconductors, packaging materials and auto parts. Oversupplies of apparel, home appliances, power tools and outdoor furniture. Dangerously tight supplies of commodities such as oil and grain.
All of that uncertainty adds cost, increases risk, and complicates planning. In the U.S. alone, supply chain upheaval sent business logistics costs soaring 22% last year, according to the Council of Supply Chain Management Professionals.
1. Resetting inventory
Big retailers with bulging warehouses and inventory gluts are turning to liquidators that buy excess and returned merchandise and sell it at discounted prices. Other retailers are trimming the number of SKUs they put on their shelves, pausing procurement, or asking suppliers to delay or reduce shipments of goods on order.
Many inventory-heavy retailers and e-commerce companies are strapped for cash. They are pushing suppliers to extend payment windows or offer financing to help them better manage their working capital.
But even as some businesses fight to slim down, others are racing to bulk up.
Some high-end and specialty brands such as Lululemon continue to put a premium on speed and availability, spending heavily on air freight to make sure that they don’t experience stockouts. Likewise, even amid signs of a cooling housing market, home builders and apartment developers are accelerating procurement of certain items such as bathroom fixtures and hot tubs that have been nearly impossible to get during the pandemic.
Meanwhile, the auto industry faces a huge backlog of orders and is unable to meet consumer demand because of the lack of computer chips and other critical parts. General Motors said it couldn’t deliver 100,000 vehicles in the second quarter for lack of components.
Rising interest rates have created a tricky balance. Businesses normally slash inventory when interest rates go up, as they have been this year. That’s because higher interest rates usually translate to higher inventory carrying costs.
“If you know anyone who works in demand forecasting or inventory management for a retailer, they could maybe use a hug,” says industry watcher Ben Unglesbee of Retail Dive.
2. Renegotiating contracts
Ocean and trucking rates show signs of softening from record highs. As a result, shippers are trying to reopen carrier contracts to renegotiate their rates, or choosing to buy space on the spot market when spot prices dip below their contract rates.
Even so, Xeneta, an ocean, and air freight benchmarking platform, says rates in negotiated shipping agreements in July 2022 were typically 112% above those for July 2021 – and 280% higher than rates in July 2019.
“The carriers have enjoyed staggering rate rises, driven by factors such as strong demand, a lack of equipment, congestion, and COVID uncertainty, for 17 of the last 19 months,” said Xeneta CEO Patrick Berglund. “July has seen yet more upticks … but the signs are clear there is a ‘shift’ in sentiment as some fundamentals evolve.”
3. Shuffling suppliers, manufacturing locations, and production cycles
Semiconductor companies are adding suppliers, diversifying production locations, and trying to bulk up with buffer stock amid a global chip shortage. In contrast, Clorox is dumping suppliers that it brought on during the pandemic when it needed to guarantee supplies.
Lego and Gap are among the companies expanding their manufacturing and sourcing footprints to serve key markets, reduce dependence on China, or cut logistics costs. There is a mini-boom in construction of new manufacturing capacity in the U.S., driven by frustration with port bottlenecks, parts shortages, and sky-high transportation costs, Bloomberg says.
Target, Gap, and others have accelerated new product design and orders of certain goods to get them into overseas production early. By stretching out production cycles, they hope to ensure adequate supplies of items they think will be popular sellers, even at the risk they could misfire on consumer tastes.
4. Charging for returns
Consumers have come to expect free returns for online purchases, but that might be changing. Footwear News recently identified 23 retailers that had introduced returns fees this year.
Apparel brand Zara recently instituted charges on returns of e-commerce purchases in some European countries, although buyers can return online purchases for free at Zara stores. UK retailers Boohoo and Asos recently said rising returns are hurting net sales, and Boohoo announced that it might impose fees for returns.
5. Giving workers new flexibility
Global food distributor Sysco has shifted to a four-day work week to improve employee retention and position itself as “an even more preferred employer.” Sysco’s new policy applies to truck drivers and warehouse associates. What’s more, it comes as the company converted its delivery model from five days a week to six days a week to improve asset utilization, virtually guaranteeing an increase in the amount of employee overtime that Sysco will pay.
6. Accelerating tech, automation, investment
The pace and scale of investment in technology and automation are breathtaking. Nike recently announced its largest-ever spend on digital transformation. Hoping to improve productivity and efficiency, Nike will roll out a new ERP system across its global network starting this year.
Meanwhile, Procter & Gamble is betting big on Microsoft cloud computing to boost efficiency in manufacturing, move products to customers faster, improve overall productivity and reduce costs. Heinz and Unilever also have made sizeable investments in new predictive analytics, digital twinning, and data modeling capabilities.
At the same time, the software and artificial intelligence powering warehouse robotics is pushing them into the mainstream. A report by the trade group Material Handling Institute indicates that adoption of robotics in warehouses will jump 50% or more in the next five years.
PitchBook Data says private equity firms invested a record $50.6 billion in logistics in 2021 – three times the amount invested in 2020 and 34% more than in 2019, the previous record year. Ongoing supply chain challenges have them on the hunt for more disruptive opportunities this year, PitchBook says.
7. Emphasizing “revenue quality”
Giant delivery specialists UPS and FedEx have boosted revenue and profits while delivering fewer parcels and packages. Both have invested in visibility technology and service quality aimed at large business customers and passed on additional costs such as fuel surcharges. And both have signaled customers and the market that they are focused on revenue and profit per parcel, and content to let others handle less enticing pieces of the business.
8. Putting off expansion
The race to add warehousing capacity and distribution and fulfillment capability appears to be slowing. Amazon is the latest to announce its intention to slow further expansion in the near term in response to cooling demand.
FreightWaves, the supply chain market intelligence firm, sums it up this way: “Supply chains are never returning to normal.”