Six months ago, the gridlock of giant container ships stranded at the ports of Los Angeles and Long Beach was a sorry sight for U.S. manufacturers and retailers desperately trying to fulfill an extraordinary upsurge in demand for their products. Although these particular container ships are gone, scores of others float idly in their place.
The historic logjam is predicted to persist through this year and well into 2022, signaling the perpetuation of a supply chain bottleneck that has upended retailers and manufacturers. “Our demand remains extremely strong, with a backlog of customer orders that has not gone down in the past six months,” said Bob Lucian, CFO at La-Z-Boy, a manufacturer of recliner chairs, sleeper sofas, tables and other upholstered products.
To address the order backlog, Lucian earmarked capital to increase production and bring on new production lines. The moves have eased the supply chain strain, but pressures continue. “Some of the 110 parts inside a recliner are stuck in those 40 to 50 containers stranded off the coast of Long Beach,” he said. “If we’re missing even one component, we can’t make the recliner. Fortunately, our large backlog enables us to make other furniture pieces in the interim until the part we’re missing arrives.”
When it arrives is open to question. “It used to take about four to six weeks to deliver a custom order for a sofa or a recliner,” said Lucian. “It’s taking us five to nine months now. And still the orders keep coming in.”
Although retailer Ulta Beauty is in a different industry sector, the chain of nearly 1,300 stores selling skincare, cosmetics, fragrances and other beauty products is experiencing similar problems keeping up with customer demand. “We’re having difficulty keeping inventory in stock, especially the `fast-movers’—our most popular items,” said Scott Settersten, CFO at the publicly traded company.
While most of its stock is produced domestically, GWP (gift with purchase) items like candles and other non-beauty products offered for free during the holiday season as an inducement to purchase Ulta Beauty’s traditional wares are manufactured in Asia and shipped to U.S. ports. “GWP products drive a lot of our sales during the holiday season,” said Settersten.
Since many other U.S. retailers and manufacturers also are shipping goods from Asia to American shores, Ulta Beauty’s supply chain organization is collaborating closely with shippers to make the company a retailer of choice, given priority status “to get what we need here in time,” he said.
“Two years ago, they did a monthly check-in on container ship locations, to make sure we’re given priority status at a port,” Settersten said. “With the holidays fast approaching, they’re checking daily.”
The Bullwhip Effect
Obviously, no business can sell what it can’t provide. In a rare period of remarkably robust demand, the companies that can’t provide what customers want to buy now are giving away the business to competitors that can provide the goods.
Blame the booming U.S. economy for the surprising uptick in customer demand, a situation not expected to dissolve any time soon. In August, five economists described the strength of the U.S. economy to StrategicCFO360 as nothing short of Olympian, with little to no weakening expected through the end of 2022 and beyond. The pillars supporting their bullish assessments include federal stimulus actions, near-record low unemployment and rising consumer optimism.
People and businesses are spending money while they have it to spruce up their homes and themselves, buying La-Z-Boy sofas and Ulta Beauty moisturizers, helping to alleviate the social isolation, uncertainties and boredom foisted on them by the pandemic. Added up, those dollars have boosted economic output well beyond the country’s pre-pandemic GDP. “We have GDP for this year at 6.7, which would be a 37-year high,” said Beth Ann Bovino, Chief U.S. Economist at Standard & Poor’s Rating Services. “After something like that, you’d think a pullback would be likely next year, but we don’t expect it.”
If only the global supply chain was in such athletic shape. Instead, it’s slow as molasses. When demand fell precipitously during the first months of the pandemic, original equipment manufacturers sharply curtailed production, as did their tiers of suppliers. When demand returns just as quickly as it plummeted, getting back up to speed is a struggle.
“What’s going on right now is called the `bullwhip effect,’” said Gary Lynch, Global Supply Chain Resiliency Leader at advisory firm Willis Towers Watson. “When there’s a sharp uptick in consumer demand after a period of unusually low demand, it causes a ripple effect across manufacturers, wholesalers, distributors and retailers. Suppliers, container ships, railcars and trucks strain mightily to meet delivery timetables.”
Over his 30-year career in supply chain management, Lynch said he’s never seen the bullwhip’s sting last this long. “The impact of the earthquake-tsunami in Japan and the floods in Thailand in 2011 were modest by comparison,” he said. “Supply chains snapped back together quickly. The difference today is we have an even more globalized and interconnected supply chain designed to optimize margins.”
He’s referring to just-in-time manufacturing methodologies that rely on lower inventory levels and safety stock to reduce the related carrying costs. To widen yields, many large manufacturers also moved production and supply sources to lower-cost regions like Asia-Pacific. Now, they’re rethinking these strategies, said David A. Levy, chairman of the Jerome Levy Forecasting Center.
“Companies left to leverage cheap labor abroad, but with widescale automation, the labor arbitrage is less,” Levy explained. “The cost of carrying goods in inventory is a much better option than the risk of losing sales because of global supply chain disruptions.”
Lynch agreed. “In today’s high demand environment, many of our clients are pushing for marginal increases in inventory, safety stock and raw materials,” he said. “They’re also looking to manufacture and source (components and materials) closer to home. And they’re leveraging data and analytics to perform deeper analyses of concentration points slowing down their supply chain.”
Managing Supply Chain Management
Companies that pursue these practices are at less risk of smarting the next time the bullwhip cracks, waiting ad nauseum for the container ship transporting its products and components to come ashore.
La-Z-Boy, for instance, has beefed up inventory reserves for critical components like plywood, OSB wood, foam and semiconductor chips—all in short supply at a time of soaring demand. “The motion mechanisms in our sofas and recliners are powered by semiconductor chips,” said Lucian. “We’ve increased the inventory and are also diligently working with multiple suppliers to get more of them.”
To reduce reliance on shipping the chips from manufacturers in Asia-Pacific, the company is sourcing supply in North America, Latin America and South America. “We’re near-shoring and onshoring some of our electronics now,” Lucian said. “We’ve got a fantastic procurement group here, with boots on the ground across the Americas to identify dependable sources of supply.”
The procurement group has negotiated broader commitments on long lead time for raw materials and components—the amount of time between the placement of the order and its delivery. “The suppliers have more sales income certainty and less revenue risk and we’re more assured of having the goods in inventory,” Lucian explained. “With the current backlog in customer orders, I’m not worried about having too much inventory. It’s manageable. If we see a slowdown coming, we can moderate the inventory volume then.”
The company also is extending its onshoring and near-shoring manufacturing and sourcing practices (La-Z-Boy is primarily a North American manufacturing business, with multiple plants and more than 11,000 employees in the U.S. and Mexico).
“Although we source from multiple suppliers in diverse geographies, we’re looking for ways to decrease our dependence for certain goods like finished woods,” Lucian said. “On some of our furniture, we have what’s called `show wood’—like cherry wood legs or an oak bar that goes across the bottom of a custom ordered sofa. We have dozens of different types of legs and frames, with about a half-dozen stains and finishes.”
The finished wood pieces are made primarily in Asia and shipped to the U.S. to be attached at the company’s assembly plants. With shipments delayed many months, the need arose to develop a faster alternative. “We’re shipping most of the wood pieces now as raw wood, to be finished with the correct stain and covering in North America,” he said. “It gives us the opportunity to more rapidly fulfill consumer orders.”
Keeping Inventory in Stock
Ulta Beauty also is doing what it can to meet accelerating demand. “The bounce back in business was much stronger than we expected when the year started,” said Settersten. “We’ve made several changes to move products faster through the supply chain to customers.”
Modifications in the layout of Ulta Beauty’s distribution centers are a case in point. Warehouses have been physically reconfigured to position the retailer’s fastest-selling products closer to loading docks to optimize the order-to-delivery time span. Another change involved the pandemic’s impact on population density at the warehouses. “We needed to reduce the number of people at each distribution center at a time of surging demand, impacting our delivery capabilities,” Settersten said.
To mitigate the impact, the company transitioned from a five-day workweek with two shifts to a 24/7 operation. “We’ve now got three shifts working through the day with fewer people in each shift,” he said.
Settersten also invested in data and analytic tools to track and trace customer orders and improve demand forecasting. “With better visibility into where orders are in the cycle, we can take mitigating actions if there’s a slowdown or friction of some sort,” Settersten said. “By improving our forecasts, we have a better idea of which product categories are in high demand to prepare our shippers and local distribution centers.”
Preparation is important since the company relies on ground transport for delivery: a combination of long-haul trucking carriers; middle-distance transportation providers like UPS, Federal Express and regional carriers; and the U.S. Post Office for the last mile of delivery. Much like the pandemic curtailed production, it also reduced ground transport movements. Given the bullwhip effect, ground carriers are experiencing difficulties getting back up to speed. “We’re keeping the lines of communication open to confirm they’re prepared for the volume of goods coming their way and then leveraging the data analytics dashboard to track their movements,” he said.
Lastly, to ensure a steady supply of foreign-sourced GWP for the holiday season, Ulta Beauty’s supply chain organization is planning to temporarily transition away from congested rail shipments at ports to trucks that can nimbly pick up the items. “We’re getting ahead of what could be an even more challenging environment as the traditional holiday retail season kicks into gear,” the CFO said.
These varied responses to the protracted debacle are aligned with supply chain management best practices. “The companies that analyze and model what’s going wrong before things get worse are in the best position to quickly adjust,” said Lynch.
Given the fleet of container ships still waiting to disembark at U.S. ports, things are not likely to get better soon. “It could be another two to three years before the container logjam finally eases back to more normal congestion,” said Lucian. “We don’t want to be stuck in this same situation again.”