Supply Chains in Free Fall

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The global supply chain disruption and destruction has been widely covered here in the U.S., obviously chilling retail C-suites to the bone. However, as it gets increasingly worse by the day, exacerbated by the looming Holiday season, none of the coverage is redundant. Each day, the broken supply chain portends lumps of coal, as opposed to toys, frocks and “all of those wonderful things.” Because of the horrific rising costs up and down the supply chain, price hikes promise to be equally horrific. In turn, this dual slam on retailers’ top and bottom lines will undoubtedly drive many more smaller businesses to close shop. The giants with deeper pockets may be able to eat the costs and maintain reasonable pricing for consumers. Either way, both top and bottom lines will take big hits.

Holiday Wild Card

Oh! And let’s not forget that no one is able to predict consumers’ shopping behavior due to that pesky and stubborn pandemic, which is also largely responsible for the supply chain meltdown. For more analysis, The Washington Post ran a very detailed article, Inside America’s Broken Supply Chain: How industry failures to collaborate and share information left the system vulnerable. More evidence that this horrific topic is not being over-covered, The Post upped the ante by updating its original report published on September 30,2021 just two days later on October 2. Metaphorically, the supply chain uncertainty is kind of like an asteroid hurdling toward Earth. Nobody knows the strike date or the damage it might do, but every day as it gets closer, no amount of speculation is too much. By the way, speaking of “wonderful things” vs. coal (that may also be in short supply), the U.S. supply chains import about $1 trillion worth of toys, apparel and footwear, electronics and furniture from Asia. The Post declares that the pipeline is “clogged and no one knows how to unclog it.”

Meltdown Phase 1

China’s “shop floor,” Vietnam, Bangladesh and others, had no idea when or how hard Covid would attack their factories and ports. They also couldn’t anticipate the early, large orders from retailers anticipating a huge pent-up shopping demand heading into the Holidays. So, as the pandemic forced closures of factories and caused a shortage in port workers, it cascaded into an enormous slowdown in the production and shipping sources in the supply chain. And finally, as supply diminished and shipping was delayed, factories defaulted on meeting the demand surge. As a result, supply chain costs and the price of doing business had no limits. You know where this train wreck is headed. And we haven’t even touched on the out-of-control costs at the receiving end.

[callout]It’s going to get worse before it gets better. Global supply chains are not built for this disruption. Everything is breaking down.[/callout]

According to the Freightos Baltic Index, the median cost of shipping a rectangular metal container from China to the West Coast hit a record of $20,586 in August, almost twice what it cost in July, which was twice what it cost in January. Also, necessary freight-handling equipment is often not where it’s needed, and when it is, there are not enough truck or warehouse workers to operate it.

Meltdown Phase 2

So, “ships ahoy!” Finally (weeks and months behind schedule), ships loaded with stuff sailed to the second gnarled mess: the West Coast ports. As container ships get within striking distance of the ports, they join a wall of dozens of other ships that are anchored, waiting (some for weeks), for a berth. On September 1, there were 40 ships anchored off the West Coast in wait mode. Less than three weeks later, the wait line rose to 73. What will it be three weeks into October? You do the math.

Just as the pandemic closed down shop floors across Asia and infected workers on the port docks, thereby driving costs through the roof, the same thing is happening in the West Coast ports. Goods are piling up in all the offshore anchored ships. When they eventually dock, they will face a shortage of dock workers and huge stacks of containers waiting for trains and trucks to deliver the goods to distribution centers across the country. Trucks and their drivers are also in short supply. It’s a waterfall of exponentially expanding problems. The same pile ups and delays occur in rail delivery. There is a lack of workers, both Covid-infected and just not enough to efficiently load the overwhelming amount of goods.

This is a nightmare of weeks and months of delay, with costs that are rising immeasurably throughout the supply chain. The ultimate result will be empty retail shelves and inflationary pricing that consumers may or may not accept. Any way you look at it, revenues and profits will take a major hit. According to Brian Bourke, chief growth officer at SEKO Logistics, “It’s going to get worse before it gets better. Global supply chains are not built for this. Everything is breaking down.”

Supply Chain Relay Race

A demand driven supply chain (vs. forecast driven) that seamlessly integrates every step in the chain and provides transparent information about the status of every function, operates metaphorically like runners in a relay race. If any of the operations get stuck at any point, the delays affect the entire chain, ultimately threatening a complete collapse.

The executive director of the Port of Los Angeles, said of the current meltdown, “The United States is decades behind foreign ports in getting carriers, terminals and shippers to provide each other access to commercial data for planning purposes. Business secrets and security issues have resulted in a fragmented approach. Individual ports operate as separate fiefdoms rather than as part of a national system.”

The Dutch city of Rotterdam is Europe’s largest port. Everyone involved in a cargo vessel’s arrival sees the same information on a common data-sharing platform, called PortXchange, which makes port calls smarter and more efficient than those using separate systems.

While shared data systems would not have stopped the inevitable crushing of supply chains due to the stealth attack by Covid, if such integrated information transparency had been in place, the current free fall might have been mitigated. “Information sharing and additional transparency is one of the few areas where indisputably we could get more capacity out of the current system,” said Dan Maffei, chairman of the Federal Maritime Commission.

Meltdown Phase 3

Eventually, the backlog of goods, those both over-ordered and under-ordered, will arrive at distribution centers or directly to the stores. Most will arrive later than planned for an orderly Holiday cadence based on seasons past. And some goods may skip the Holidays altogether, landing in the new year.

Burlington Stores CFO, John Crimmins, told analysts in August, \”There aren\’t enough containers. There aren\’t enough ships. There aren\’t enough trucks or trains. There is more volume now than any part of the supply chain pipe can adequately handle. Trying to accelerate and pull forward orders even further increased the pressure on the supply chain, helping to drive even higher rates.\” So, rather than the spectacle of an endless aisle jammed with Holiday gifts, it will look like a specter of empty shelves.

According to a report from consulting firm Berkeley Research Group, the supply chain logjams mean that \”many items are in shorter supply than normal, so the selection of hot/trendy products and the depth of promotional discounts will likely be less prevalent.\” They also see inflation as \”a looming issue\” hanging over the season. Will retailers try to increase prices to cover cost increases, or will they choose to take a haircut on the bottom line? I’m glad I don’t have to make that decision.

And I would add that Covid-19 will still be hanging heavy over the season, which will have a negative effect on consumer behavior, likely dampening the Holiday spirit and pent-up demand. So, based on all of the above, it begs the question: how do Mastercard, Deloitte, NPD, and AlixPartners come up with predictions for Holiday sales growth in the range of seven percent from MC, to five percent from NPD (an extended spending season October through early January), nine percent from Deloitte and 10 to 13 percent from AlixPartners.

According to Steve Sadove, former CEO of Saks, this Holiday season is “baked into the cake.” He said consumers are already buying into the Holidays, which he says, has already started. Further, he agreed increased costs throughout the supply chain will be brutal, however, he believes consumers will manage to pay higher prices, and that retailers will have the inventory to meet demand. He obviously agreed with the supply chain mess, and questions how soon it will be fixed, suggesting it might continue well into 2022, and maybe into 2023.

While his view was positive for the Holidays, he advised that a larger issue going into 2022 is the question of consumer spending.  And of course, the supply chain mess will simply exacerbate any slowdown.

So, the U.S. was somewhat optimistic about the pandemic departing in 2021. According to the NRF, Holiday retail sales grew 8.3 percent in 2020 but optimism has dropped this year as the Delta Variant surged, so it’s going to be interesting to see how the numbers come in this season. And on that note, I will end with my own rather cynical comment. No one, I repeat, no one can accurately predict this season’s outcome, because no one can predict the historically unprecedented effect of a collapsed supply chain, and no one can predict how consumers are going to behave.

So, take a deep breath, and hang on. We’re in for a wild Holiday ride.

Note: This article was updated on 10/7 correcting NPD’s holiday estimate from 9% to 5%.

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