Persistent bottlenecks throughout the global supply chain continue to stand in the way of middle market consumer goods companies’ ability to take full advantage of robust consumer demand. And while the challenges these companies face are not unique to the middle market, midsize businesses will need to leverage nimble strategies to navigate disruption and surging costs with a more limited toolbox than their larger counterparts.
Ocean shipping rates from Asia to the United States continue to climb as availability and congestion plague operations. The benchmark rate for a 40-foot container shipped from Shanghai to New York and Los Angeles climbed to $15,124 and $11,659, respectively, in the first week in September, more than double the amount a year ago. Air freight has followed suit and remains well above pre-pandemic levels despite subsiding from peaks in the second quarter of 2020.
Source: World Container Index, Peter Döhle Schiffahrts-KG, Bloomberg, RSM US LLP
While the spike in import costs erodes margins, consumer goods companies are missing out on sales and losing customers as lead times continue to grow. The container ship time index, which is a composite of container lead times compiled by international brokers, is floating around six times its pre-pandemic level. With many consumer goods companies already dealing with extended time from design to market, this slowdown is leading to popular styles being out of stock and a frustrated customer base.
Even as the global economy moves past the pandemic trade strife and labor challenges that existed before COVID-19, it is still unlikely the global shipping environment will get back to business as usual any time soon. While some large consumer goods companies have diversified supply lines and manufacturing networks, and even chartered their own container ships to combat these challenges, middle market companies may not have the size or scale to pull those levers. With the holiday season around the corner, middle market consumer goods companies need to be thinking about the steps they should take in the near-term as well as their long-term strategy for dealing with a new logistics environment. RSM has identified a range of strategies that can help companies cope with the current supply shortages.
Learn from demand data to maximize short-term profitability
Capture data to optimize pricing: In certain sectors, businesses have an opportunity to pass along rising logistics costs to consumers. Finding out what products consumers are willing to pay more for and how much more they would be willing to pay starts with a sound data infrastructure that captures data from customers, competitors, marketing and alternative sources. Off-the-shelf data science and business intelligence tools can be used to identify blank spaces where consumers are willing to tolerate price increases.
Maximize efficiencies: Connecting demand data to operational planning and supply sources allows for more agile production and planning. Benefits include scenario analysis for volatility, bringing the right SKUs (stock keeping units) over at the right time and production efficiencies. The most immediate benefit may be leveraging the cost efficiencies of planning full container loads rather than partial. Consider focusing on the critical few—those components or finished goods that are most impactful to the portfolio, but also most challenging in the current environment.
Evaluate domestic footprint: Understanding where demand is and what is driving it could help businesses bring their products closer to the end consumer. A fresh look at optimizing distribution nodes given the supply variability and consumer requirements could mean consolidating inventory for more agility on fulfillment. Third-party logistic networks should be evaluated to determine where domestic shipping could be more efficient.
The long game
Rethink the international footprint: The concept of “nearshoring” isn’t new, but with rising shipping costs, erratic supplier demand and seemingly increased manufacturing costs, the impact of lead times is beginning to change the calculus of producing closer to the end consumer. While infrastructure and labor will still be a concern, consumer goods companies should be evaluating the benefits of speed-to-market and tariff savings.
Improve logistics: Shipping costs have reached record highs and transportation disruptions and driver shortages have cost companies dearly. It could be time for many consumer goods businesses to consider relocation of production and distribution facilities. A deep analysis of freight opportunities to improve delivery efficiencies, and identify extraneous spending, is likely needed as well.
Negotiate now: Consumer goods businesses should consider their ability to stock up for next year’s holiday season by working with vendors now. This includes negotiating surge rates with third-party warehouses to take advantage of stocking up earlier in the year to stay ahead of demand and take advantage of optimal shipping rates.
Weigh warehousing improvements: From process improvement and facility layout to labor resources and new technologies, does your warehousing solution need a refresh? Improvements can make organizations more nimble to react to market and business changes.
Boost business intelligence: Keen intelligence on current operations and customer preferences can optimize demand planning, forecasting, inventory mix, procurement scheduling and more.
Assess overall digital strategy: Improving digital strategies doesn’t mean one-off integrations of automation, machine learning and other innovative technologies. It’s about thoroughly evaluating business needs and then creating a digital roadmap that provides strategically aligned solutions. While maximizing current digital solutions could be your short fix, a broader assessment for long-term implementation identifies challenge areas, new opportunities, risks and the right technologies to improve your supply management efforts.
Improving current supply chain operations could fortify business, but consumer goods companies shouldn’t wait for the next disruption to do it. Quick planning now and strategic thinking for the future mean a stronger business that meets customer demands and increases profitability.
Casey Chapman, principal, RSM US, contributed to this article.