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Insight: The Perfect Storm

Article | What I learned in Supply Chain

The Perfect Storm

October 29th, 2021
3 minute read

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Every week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of an on-going series. Each article aims to share a little insight into what's going on that week, and to help foster discussion amongst industry professionals across levels, geographies, and companies.
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Every major publication and news outlet is reporting on the supply chain crisis. Most of the reporting has been pretty shallow, leaving all to wonder how it can be solved. Here’s my take on what caused this crisis and how we get out of it.

When a ripple becomes a wave


The problems we are experiencing now started in March 2020 when COVID hit and suppliers in Asia shut down. This began a series of “shocks” to the supply chain that are still rippling. By May 2020, suppliers were mostly operational again, but there was a huge downturn in U.S. demand. Carriers responded by cancelling capacity, however demand was back by July and importers found themselves scrambling for equipment. The container shortage was a byproduct of the cancellations – and here’s why.

Vessels are normally loaded with empties to serve the imbalance of trade (roughly 4:1). When capacity was cut, so too was the empty supply of containers back to Asia. This backlog created both a shift in the “normal” peak season, as well as panic buying — meaning no relief during a normally slow Q1 in 2021.

For context, Asian exports are typically forty percent lower during January-April compared to May-August. As a result of COVID, this year has seen the “normal peak” shift by at least two months due to numerous delays in getting raw materials, production taking time to ramp back up, a lack of containers at origin, and lack of space to put them at destination.

In addition, other “macro issues” caused further ripples, including COVID outbreaks, rolling blackouts that shut down factories sporadically, massive spikes in raw material costs, and random shortages of key components. All the while, demand actually increased based on a relative glut in disposable income.

Senior management at major importers are attributing earnings and missed sales to these challenges, as the bottom line is that products took longer and cost more than was projected.

“Macro issues [have] caused further ripples..Senior management at major importers are attributing earnings and missed sales to these challenges."
Mercado Labs | Rob Garrison, CEO & Founder
Rob Garrison
Mercado CEO

We’re Now Feeling the After Shocks


All of these massive shocks have in turn created dozens of smaller shocks which have been just as challenging for the logistics professionals trying to manage them, including:

  • Higher container costs, resulting in container-by-container decisions on what to ship.
  • Container availability, leaving importers scrambling to find space.
  • Port shutdowns, creating vessel delays and backlogs (contributing to lack of container availability).
  • Labor shortages, impeding the ability to get cargo unloaded, loaded, or moved.
  • Government regulations, such as how high containers can be stacked or what type of trucks can pull containers.

Money, Money, No Money

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For many importers, the cost of shipping is now equal to–or even greater than–the cost of the product itself. Add the delays to market, penalties from carriers, cost of storage, and more...it’s simply not possible to make a profit.

A simple example is a container of gift boxes that an importer buys for $20,000 at cost from a supplier in China. A “typical” markup is 100%, so the importer hopes to sell those baskets for a total of $40,000.

In addition to the purchase price, now baskets have a tariff of 25%, ocean fees can run to $20,000, storage can be $3,000, and domestic transportation can be up to $5,000. In this example, cost can run up to $33,000 all-in. That leaves a $13,000 loss before adding all of the Selling, General & Administrative (SG&A) expenses required to buy, ship, and sell the products.

Two years ago, that same purchase would have cost $2,000-$5,000 for ocean transport with no tariffs, less storage, and less domestic transportation cost. Times have changed.

A Chain Without a Chain Isn’t a Chain


A supply chain is called a chain because each link is connected to the next in order to achieve the desired outcome. When a link breaks, all the subsequent links are affected.

I had an investor ask me if I saw any way out of this mess. Because there are so many issues, and they are like dominos, my short answer was no. However, if demand decreases for any extended period of time, it could provide enough relief on this pressure cooker.

In my mind, there are five key things that must change going forward:
  1. Governments should put in place short-term intervention to remove regulations, provide trucks, and provide temporary storage to clear the backlog.
  2. Importers must automate the 80% of the supply chain that is currently offline.
  3. Carriers must honor commitments outlined in contracts. Carrier executives must conduct negotiations in the country where the customer is located.
  4. Importers should also add an additional month to lead times.
  5. Businesses should form a cross-functional supply chain task force to study their end-to-end import process with a goal of improving resiliency.

About the author(s)
Mercado Labs | Rob Garrison, CEO & Founder
Rob Garrison
CEO, Mercado Labs
LinkedIn

About the Series

Each week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of a series run for his LinkedIn followers. Each article aims to share a little insight into what's going on that week and to help foster discussion amongst industry professionals across levels, geographies, and companies.

You can connect with Rob on LinkedIn by following this link.
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