By Arthur Mansourian and Aykut Cakir
The ocean-cargo industry is facing numerous challenges which affect the flow of global goods. When the first lockdowns took place in 2020, shippers had reduced capacity in response to falling demand, but now that the demand has increased, ports have been clogged. At the same time, the industry has been consolidating, and this has left retailers with fewer alternative carriers to increase capacity.
Retailers are also facing capacity constraints, as well as large cost increases, in their middle-mile operations. Spot and contract rates are high, as retail imports and produce shipments have caused demand to increase. Labor shortages have also contributed to the middle mile problems. While transportation and trucking employment is recovering from the pandemic lows, it is simply not enough to keep pace with demand.
Within warehousing, many factors contribute to rising costs. Vacancy levels have dropped to their lowest points ever, absorption rates are high, and wages are at a peak. Retailers are competing for talent by offering high wages, bonuses, and benefits.
Direct to consumer last mile shipments have risen over the last seven years, thus, current capacity investments by large integrators are not sufficient to meet growing parcel demand. Providers have increased rates and added surcharges, and those expenses get passed along to retailers.
Putting all of this together, these trends have affected supply chains and forced retailers to spend a lot of time trying to deal with the impact. By taking a broader view that includes all sorts of risks, the retailers that are resilient are taking bold short-term actions. There are several main actions that supply-chain leaders need to take in order to manage chaos and mitigate disruptions.
1) Implement a digital control tower. The vast majority of retail supply chains are tracked and governed through multiple data systems managed by different teams. By implementing a digital control tower, companies can create transparency and speed up response times.
2) Strategically allocate inventory. By prioritizing markets for inventory
deployment, and ensuring promotional plans line up with available inventory,
retailers will have help with immediate short-term disruptions and tightening up
3) Optimize and prioritize purchase-order flows. This will ensure that critical inventory is
available when it’s needed. Some
examples of accomplishing this include front-loading floor-set and peak-season
orders, and considering alternative transport modes. While it will require retailers to use
existing analytic capabilities in the short-term, in the long-term, investments
in advanced analytics can automate the risk-assessment process.
4) Reduce risk through supplier fragmentation. While tempting, retailers should resist
concentrating too much of their business with one supplier in order to get
volume discounts. Fragmenting the
supplier base can create opportunities to increase capacity as demand
5) Build longer-term supplier partnerships. By investing to longer contracts, price
volatility can be reduced, and suppliers will be able to prioritize certain
strategic accounts over others that are more short-term.
6) Commit to efficiency. Transportation planners need to prioritize
efficiency in order to reduce the total number of loads, and change their
assumptions so as to create a balance between truck usage and speed. Retailers can focus on productivity
improvements as a form of risk mitigation in order to protect against labor
7) Consider dedicated or private fleet capacity. If the combination of external suppliers and
internal productivity cannot secure the required capacity, retailers with large
contract fleets can consider in-house operations. While more expensive and complex, many large
trucking companies will prioritize service to dedicated customers over
others. This can increase reliability
and reduce cost.
Once supply chains have stabilized, transformation efforts need to show resilience and create long-term value. There are three themes that encompass this.
1) Reset the supply chain. Since the past network won’t be able to serve future needs, retailers need to rethink everything about their suppliers. This starts with re-evaluating where products are sourced and how disruption risk factors into decisions.
2) Change buying and planning behaviors. Retailers will need to make long-term
decisions on how to ensure that they are minimizing disruptions to
deliveries. By accelerating timelines
and planning, freight availability and rate can be directly impacted. Allocating inventory across an integrated
network can enable retailers to locate goods closer to their destination, which
will reduce costs and increase service.
3) Invest and automation and analytics. Doing so will improve service and reduce TCO
to the network. In today’s world,
automation is a way to increase service levels and reduce the risk of lost
sales from stock-outs.
As supply-chain disruptions continue, there will be volatility and uncertainty for a while. But retailers can take control by addressing the disruptions in the short-term and using the measures to plan for future resilience. Once the short-term is stabilized, retailers will need to change how supply chains operate to prepare for the future. None of the items listed above will have an immediate impact or happen on their own, but if retailers have the vision to transform their supply chain, they can reap big rewards. And these efforts will establish long-term resilience to help retailers deal with future disruptions.
About the Authors
About the Authors
Arthur Mansourian has a 12-year track record as both a management consultant and investment banker, advising clients on valuation, capital markets, structured financing, mergers, acquisitions and divestitures and general corporate strategy.
Mr. Mansourian served as Vice President while at NMS Capital Advisors, when the company achieved cumulative sales growth of over 5,100% with annual compounded sales growth in excess of 120% from 2012 to 2017.
Aykut Cakir has worked for major Fortune 500 companies such as Procter & Gamble, Roche Pharma Group, and John Deere. He has 28 years of experience in Operational Finance, Accounting and in General Management with international business experience including in the USA, Europe, Middle East and Turkey.
Aykut holds a Bachelor’s degrees in Finance and Economics from the University of North Carolina. He also teaches, Financial Analysis, Project Management, and Decision-Making classes part-time at the Beykent University. Lastly, he’s published an internationally accredited article on “Financial Perspective on cost of Palliative Care.”