In this two-part Ferrari Research Group Advisory commentary, we address why the groundswell of increased concerns being placed on high levels of supply chain disruption along with global and domestic transportation cost inflation will likely be the accelerant for the rethinking and realignment of industry supply chain sourcing strategies.
Predictions and Context
Included in our authored Ferrari Research Group’s 2021 Advisory, Annual Predictions for Industry and Global Supply Chains were two specific beliefs.
Prediction Three was that in 2021, augmented resiliency in supply network strategies would become far more important in assuring business and profitability growth.
A further prediction, Prediction Nine, reflected our belief that significantly increasing global-wide transportation costs and eroded service levels would foster new thinking in supply network sourcing.
Our predictions summary included the following paragraphs:
If there is one significant pain point for multi-industry supply chains during 2020, it was global transportation, both from overall service level erosion and disruptions and associated skyrocketing cost increases. These cost challenges transcended global ocean container, regional and domestic trucking, as well as parcel delivery networks.
Substantially increasing cost factors are of considerable concern to businesses large and small and are reflected in multiple interviews and survey data among supply chain management and business leaders
Challenges Now More Discernable
In a previously published Supply Chain Matters editorial commentary titled, Time For Supply Chain Management And Business Leaders To Address Realities And New Thinking, we advocated that it was time for industry supply chain management teams to take a step back and address obvious realities of what has occurred and of why. It is ever more important to educate and advocate C-Suite and lines of business executives on the notions of supply network risks and ways to establish added resiliency and flexibilities for servicing customer demand and service needs.
As businesses enter the all-important last quarter of 2021, it has been become increasingly apparent that non-stop cascading supply chain disruptions with eroding carrier service levels and the steep increases in global transportation costs are now a growing concern for senior business and supply chain executives among many industry settings.
This concern is not new, it began several years ago. What has changed is the confluence and degree of added costs and multi-industry supply chain disruptions that are impacting businesses. They range from a cascading effect of increased commodity and component, labor, fuel, demurrage and transportation costs.
Some business and supply chain executives may be of the view that these costs increases are temporary, brought about by the extraordinary product and unit demand and online retail explosion and the post pandemic demand for added products.
We caution and advise that that may be short sighted thinking without some structural supply chain rethinking, reassessment and actions.
We believe we are not alone in such thinking.
Additional evidence continues to appear most every week. The latest examples are:
The Wall Street Journal’s published report: Rising Shipping Costs Are Companies’ Latest Inflation Riddle (Paid subscription or metered view), indicates that some CEO’s expect elevated transportation costs to extend into 2023.
With container shipping rates now 14 times higher than during this same time in 2019, some economists are now messaging that supply chain focused price shocks are more intense and more durable than initially thought. The report cites fabric and crafts retailer Jo-Anne Stores CEO indicating that: “Sometimes the ocean freight now is actually more expensive than the cost of the product” while questioning whether transient equates to six months or 24 months.
The CEO of discount retailer Dollar Tree is cited as indicating: “We are not counting on material improvements in 2022, especially in the first portion of the year.”
Global consumer products icon Procter & Gamble is reportedly projecting $1.9 billion in added after-tax costs for its fiscal year ending in June 2022 and has already cautioned to investors that the speed and scope of freight and commodity cost increases are too great to be offset completely with ongoing product price increases.
In the company’s latest report of quarterly financial results, global footwear and apparel provider Nike disappointed on Wall Street’s total revenue expectations. Executives indicated that demand for the company’s products remains strong, and revenues would have been higher if not for supply chain constraints. Nike’s CFO indicated that the company is not immune to the global supply chain headwinds and Nike lost 10 weeks of production in Vietnam due to factory lockdowns related to local COVID-19 outbreaks. Executives further warned that next quarter’s all important holiday quarter sales estimates could be impacted by ongoing production shortfalls in Vietnam and Indonesia. Company inventory levels were reportedly low and would take several months to return to expected planned levels.
Warehouse format food and grocery retailer Costco’s latest quarterly results included impressive comparable sales growth. However, executives pointed to higher labor, transportation costs and port delays as pushing costs and prices higher. Noted was that price inflation on products had risen to a range of 3.5 percent to 4.5 percent on average. The retailer additionally indicated that it will separately charter three ocean vessels in 2022 to transport containers of inventory between Asia and North America.
In the increasingly important retail and wholesale trade channels, this week’s headlines indicating that global parcel carrier FedEx plans to again hike rates in the coming year to an unprecedented level of 5.9 percent, in addition to added fuel cost surcharges is yet another sign that carriers are not going to relent in the current market where carriers hold much of the leverage. Rival UPS, and other carriers are likely to follow suite.
In Part Two of this commentary, we will further explore the areas of increased supply network resiliency and increasing transportation and logistics costs and share our perspectives that both of these areas will undergo increased scrutiny over the next 2-3 years.