9 strategies for surviving equipment, freight capacity shortages and rising prices
“When will this end?”
It’s a question we hear on every call, from brand owners, large and small, around the world. Supply chains are limited in capacity and prices keep rising because people spend on things rather than on experiences. The pressure is shaking up board meetings, related to material availability, transportation costs, labor shortages, container shortages, etc.
The operational impact? Pick a puzzle: skyrocketing shipping costs ($ 20,000 for a 40 ‘container? Yeah, it happens …), missed delivery times, tied up working capital, customer service calls enthusiasts and more.
Fasten your seatbelt, off we go for a long, bumpy ride. Many believe this is what the new normal will look like until 2023.
According to ING, there are five reasons why the Armageddon supply chain could continue until 2023, including imbalances between supply and demand, few alternatives to sea freight, continued port congestion due to labor shortages, imbalances in recovery rates by country and higher cancellation rates. navigations. ING reports that we should see some relief when around 6% of shipping capacity goes live in 2023 (like chips, construction takes time); However, “the upcoming increase in ocean freight capacity will put downward pressure on shipping costs but will not necessarily return freight rates to pre-pandemic levels as container carriers appear to be. have learned to better manage capacity in their alliances “.
The bottom line? Higher container costs could be here to stay …
Some are taking extreme measures, recalling the crazy first weeks of the pandemic when major sports teams chartered cargo planes to transport PPE to Covid hotspots. This week, The Home Depot said enough was enough and boldly announced that it was taking control of the shipmentâ¦ and contracted the exclusive use of a container ship. âWe have a ship that’s going to be ours and it’s just going to come and go with 100% dedicated to Home Depot,â said company president and chief operating officer Ted Decker.
OK, few brand owners have this kind of powerâ¦ so what can we do for the rest of us? If you are a low volume shipper, your options dwindle. According to Crane Worldwide Logistics, âfrom June 14e, 2021, FedEx Freight loses 1,400 lower-than-full-load (LTL) margin customers, affecting thousands of locations, to reduce terminal bottlenecks and shipping delays as unprecedented quantities tonnage is pouring into the LTL sector. We believe other companies will follow suit in the coming weeks.
If you’re a mid-volume producer, here are nine strategies executives are using to manage risk in this volatile environment.
First, let’s talk about freight.
1. Forecast / best allocation
Suppliers will benefit from proactive 12-month forecasting. While they might appreciate the difficulty of knowing what’s going on with the market, material prices, logistics, and the whims of your customers, anything (even if “directionally”) would be helpful for their overall business planning. Be curious and learn all you can about your supplier’s material ordering practices. The more you can share, the more powerful you will be for a higher allocation (taking more advantage of their limited capacity). Predictability has power.
2. Freight consolidation
The grouping of LCL deliveries creates purchasing power. Bigger fish are more attractive to carriers. When our team finds capacity, we consolidate customer shipments into larger shipments to create economies of scale. Carriers prefer full containers vs. LCL.
3. Fast boats
Less known but less expensive than the plane, the “fast boats” bring goods more quickly to the port. Upon arrival, goods receive priority routing and faster customs clearance, saving approximately two weeks on the process.
Next, here are some ideas for dealing with shortages and rising prices of materials.
4. Term management
Material prices are hitting all-time highs in many categories: ABS polymer is up 30% year-on-year, iron ore is up 100% year-on-year, stainless steel is up 30% year-on-year, hot rolled steel is up 90% year-on-year, etc. The days of 100% payment upon receipt of goods are like ancient history. Suppliers require large down payments (in some cases 100%) and the balance on the bill of lading. Suppliers’ demands are more assertive as their subcontractors demand 100% upfront payment for materials. Buyers refusing these terms will be bypassed in favor of other buyers lined up and ready to pay (in these times of high demand and shortage of materials). The number of broken contracts, with fixed prices, fixed shipping costs, is increasing. Buyers are asked to pay cash prices related to material prices and actual freight. How to manage? If you can (we realize that in many industries this is not possible), have clearly defined contracts that describe when and how to adjust prices based on agreed indices. There are two advantages: 1) helping to avoid unpredictable spot prices and 2) less arguing over when and how to adjust prices. This practice applies to both supplier and customer agreements to ensure that you have the flexibility to pass on increases (if you can).
5. Produce and / or downgrade
New automobiles have between 40 and 150 chips, and shortages are causing plant closures around the world. To cope, Ford continues to produce F150s in Kentucky and rents parking lots to store them until the chipsets are available. GM is winning, for example, by temporarily removing its smart rearview mirror system. With on-chip delivery times spanning 200, 250, or even over 350 daysâ¦ maybe that old-fashioned analog speedometer will make a comeback?
6. Force majeure
This tactic is used in some industries, but not in others. We hear more and more about clauses exercised in the automotive industry where contracts tie the availability of parts to performance, and suppliers face heavy fines for failure to deliver. Force majeure is less seen in consumer goods, where big box retailers hold the cards and simply pull a product off the shelves in stores and replace it with another. If your contracts with your clients have built-in penalties, network to find out if force majeure letters are being issued, by whom, for what, and when.
7. Keep customers and distributors alive
The effective strategies your suppliers use to manage allocations upstream can be useful in managing the expectations and satisfaction of your own downstream customers. The basic idea is to avoid starving the customers on whom your income (and theirs) depend. Review your allowances often to make sure the channel you generated income on stays alive.
8. Communicate like crazy
Arm your salespeople with the resources to set expectations. Give them access to material price indexes, weekly shipping cost data, currency exchanges and other tools to explain the volatility you encounter. It will ease difficult conversations. Customer service is the key.
9. Consider directly
If you are doing business with a commercial company, get better visibility, quality, service (and potentially better costs) through direct relationships with suppliers.
For many months, consumers shifted spending to goods when they couldn’t spend on services like vacations and dining out. Today, demand exceeds supply in the product and service sectors (good luck renting a car this summer). The boost from COVID will be with us for a while.
Which creative and proactive strategy works for you? We appreciate your feedback.
Having lived and worked in Asia for several years, Jennifer Clement helps executives navigate Asian business strategy. Jennifer is a business acceleration leader for Complete Manufacturing and Distribution (CMD), a company that helps companies around the world accelerate their bottom line with initiatives in Asia including market strategy, sourcing, manufacturing , logistics, quality management, facility construction, business process outsourcing, continuous improvement, e-commerce, and more.