It’s Covid’s Fault…
It’s Covid’s Fault…
It seems to be the easy and go-to excuse for most if not all companies these days. Due to Covid [insert bad service excuse].
I can say that on more than one occasion I have been a little mad at the person on the other side of the counter or phone when I hear what seems to be a non-sequitur of an excuse that in the end is blamed on Covid.
I’ve been in the supply chain game my whole career. Starting back in 2003 when I helped start my first company. Navigating the supply chain has never been the easiest thing in the world, but it used to be somewhat predictable and manageable. You would have your one-off hiccups or industry-related specific problems. Never in my career have I seen anything like the disruption that COVID has caused. Every industry, vertical, human on the earth has been affected by a microscopic virus.
Be Fulfilled is a solutions-driven company. We’ve never met an obstacle we can’t solve with a positive attitude and creative thinking. I’ve been proven wrong more times in the last year than probably the entirety of my career and it’s been humbling. So in my effort to provide context and clarity to clients, potential clients, and anyone in the product game, I want to lay out some of the things that are happening and how they all interact with each other to create what is one of the greatest challenges facing our economy.
There are three main components that when combined create a storm of sorts: Labor Shortages, Raw Materials, and Transportation that together create 99% of the delays we are seeing.
I’m no economist nor am I a politician, so I won’t bore you with my opinions. Instead, let's focus on the fact that both in the USA and across the world there are more jobs than there are people either qualified or willing to fill those jobs. That creates a labor shortage. Labor shortages lead to higher wages. Higher wages lead to inflation.
We’ve all heard of lumber prices going up by at least 25% and sometimes as high as 800%, just for the basic building block of our entire housing industry. This has led to increased costs of housing which has caused specific markets to experience wild inflation in the cost of housing. This mixed with the migration of remote workers has been unprecedented.
Raw material increases have affected nearly every sector of the economy. Every industry has seen some sort of shortage and therefore the price increases on raw materials.
Post-Covid demand has been much higher than expected as we have all shifted our buying habits in significant ways. Online sales took nearly 25% of traditional retail sales during 2020. This was to be expected with malls and stores across the country closing for months at a time. In 2021, we are seeing no sign of this trend ending, as consumers have been accustomed to buying online more now than ever. This is a seismic shift in our economy. One that I cannot understate. Those of us growing our online business are in the right place at the right time.
This explosion of growth in small to midsize direct to consumer brands has had a profound effect on raw material usage and the type of products being produced. Higher-end brands are emerging with high-end materials sold directly to consumers. This is a shift away from traditional retail channels that demand discounts of 50-70% off retail for their bottom line, which usually leads to lower quality raw material choices. Brands are now able to upscale their product while adding more value to their consumer base. It’s wonderful AND it’s contributing to breaking everything we knew about the supply chain.
Demand is up 30%. I want you to think about all the trade that happens in the world and stop and think about what a massive number 30% is. One brand growing by 30% is great, every online brand growing by 30% is something completely different. Now mix in a labor shortage. Now we have increased prices, slower production, and the classic supply and demand curve.
This means raw material suppliers raise their prices, factories have more business than they can realistically produce because they can’t hire people fast enough and this is the classic equation for inflation. Everybody is forced to use the last tool they have at their disposal: Raise prices.
I was “lucky” enough to be in the supply chain game in 2008 during the housing crisis. I remember how cheap it was to ship containers and air freight items into the US. There was more space than anyone knew what to do with. The big shipping lines started to cancel new boat orders. They have to project out 3-5 years into the future for a new vessel order, these are billion-dollar investments that can sink these conglomerates if they over-project trade volume.
Fast forward to 2021, demand is up 30%, ships were already operating at capacity from 2018-early 2020. Now how do these ships accommodate a 30% increase, how do shipping companies add more capacity? The answer is - not quickly, if at all, and only if they think the increase in demand will hold.
What do they do in the meantime? Raise their rates, creating a negative incentive to build more ships as their rates are at all-time highs and are booked out months in advance.
To be fair to the transportation industry, they are also dealing with a series of epic failures, from the One Opus losing over 1,800 containers in the largest maritime disaster to date in November 2020. In fact, one of our clients had a shipment on that boat. It didn't fall off the boat, but it arrived in July, 8 months after it left China. There is also the much-publicized Ever Given that blocked the Suez Canal. Estimates say this large ship affected 12% of the world's economy based on lost revenue and delays.
You may have seen the pictures or heard about the backups in the Port of Los Angeles and the container ships that are docking offshore because the docks can’t unload them quick enough. Our good friend Labor shortage is playing a role here. These ships are bigger than ever and can often carry as many as 10,000 containers. They take longer to unload and with less labor than ever they are taking longer. Once unloaded they are either trucked or put on a train. Mix the 30% increase in production with the exact same amount of trains and fewer truck drivers you have now the most active ingredient in most delays, Transportation.
Air Freight has seen rate increases of 50%-300% making it nearly infeasible for many products. DHL, FEDEX & UPS are limiting the number and total weight a single shipper can ship in one day as well as throwing out almost all service level agreements and not honoring rates once considered sacred. Consolidated airfreight which once filled the gap between Ocean and Express Air, is nearly non-existent. Consolidated airfreight leveraged the empty space in the belly of commercial passenger jets. Less travel = less jets = increased rates.
There we have it, a perfect storm of sorts.
So what can you do about it?
Most of these concerns can be mitigated by adding a few more weeks to your production and shipping timelines. This can be frustrating, scary, and hard but it is the most surefire way to reduce the risk of running out of product to sell. We like to have all projects for Christmas well in the works by the end of July. It doesn’t mean you can’t start projects later, you just risk your pre-Christmas timelines.
You can plan for days and still be delayed. It’s the reality of it all.
Look for Nearshoring Options:
Depending on the product, material, and complexity there are many opportunities to manufacture products in the US, Mexico, or other Central/South American countries. This has been a big passion of mine as Be Fulfilled continues to grow. We want to leverage our volume, expertise, and opportunities for our clients to sell more products with fewer delays.
There is a fine line between accepting what is and pushing for improvement. The truth and ability to successfully manage a situation like the one we are in is a mixture of both.
I believe over time the market forces will even out the supply chain. I’m just unsure of the time frame. By looking for creative solutions and staying willing to adapt and plan a little further ahead, most of these challenges can be solved.