Jun 04, 2021

Supply Chain, Inventory Woes Persist and Could Worsen

  • by Admin

The supply chain issues that have been driving up product prices and causing inventory shortfalls in the North American promotional products industry during the economic recovery that's followed COVID-19 shutdowns show no signs of abating and could potentially worsen. That's the message from industry suppliers who have been trying to mitigate the issues in order to provide sufficient quantity of quality cost-effective products in a timely fashion to help fuel promo's sales recovery from the pits of the pandemic, fallout from which drove down industry distributors' collective annual revenue by nearly 20% in 2020. Inventory shortfalls and rising prices are big issues for the #promoproducts industry. This one-minute tells you why and where things are headed. pic.twitter.com/YsKP6Dr8gm — Chris Ruvo (@ChrisR_ASI) June 8, 2021 Accounts from distributors indicate that demand for promo items has been increasing significantly in recent weeks, as the U.S. reopens and life returns to something closer to a pre-coronavirus normal amid advancing vaccination rollout, the lifting of societal restrictions, easing of mask mandates and the return of in-person events. Still, shipping/fulfillment issues, rising raw material/labor costs, difficulties suppliers are having hiring enough staff, unfavorable exchange rates and other factors are contributing to insufficient inventory, higher product prices and lengthened delivery times for orders, which make it more challenging for distributors to meet client needs and capitalize on rising demand for branded merchandise. "Inventory issues, for example, could stifle growth," says Sarah Whitaker, owner of Hopkinsville, KY-based Williams Advertising (asi/360402). "If I can't sell you the shirt you want, you're either going to wait to order, or not order at all, unless we can offer a very similar option." Listen to this ASI Media Promo Insiders podcast on supply chain disruption for more information. To their credit, suppliers recognize the threat. The good ones are doing everything in their power to navigate the issues and to keep service levels high and pricing down. The problem is the global supply chain across industries, including promo, is a mess. There's only so much suppliers can do. "Both suppliers and distributors have done nothing wrong, but because of what's going on in the marketplace, we find ourselves in a difficult situation," says Dilip Bhavnani, chief operating officer at Los Angeles-based Top 40 supplier Sunscope (asi/90075). Shipping & Container Costs Have Soared The supply chain fiasco is a direct result of COVID-19. When the pandemic and its related societal shutdowns struck North America in March 2020, they triggered a plummet in business across industries, including promo. That led to a rapid decline in importing by Western companies. As 2020 wore on, however, demand began to return - faster and more widely than anticipated. Companies in many sectors were suddenly looking to import with gusto again and the global supply chain simply wasn't ready for the avalanche of demand. A direct repercussion was that space on importing ships soared to a premium and the cost of shipping containers skyrocketed. The price of air freight, capacity for which declined amid COVID, increased, too. While there's been some fluctuation, the price for ocean cargo containers remains extremely elevated - something promo suppliers have no control over. "Availability of containers has been greatly reduced, with importers literally in bidding wars to secure space," shares Bhavnani. "Recently, we secured containers at a cost that was five times greater than what we were paying pre-COVID." Suppliers note they're competing with importers across industries, including those with massive spending power like Walmart and Costco. Dilip Bhavnani, Sunscope Sunscope is far from alone in contending with such eye-popping increases. "Last year, containers to Los Angeles were under $3,100, now they're over $10,000," says Jeffrey Nanus, president/CEO of Norwood, NJ-based supplier AAA Innovations (asi/30023). "In 2020, a container to New York was $4,200. Now it's over $13,000." Western importing demand is expected to remain high and even increase in the months ahead as economic recovery intensifies and as importers prepare for the holiday season. That figures to keep the prices of containers well up. "It's hard to guess how high containers can go up to at this time, but I don't expect rates to come down until late December," says Jing Rong, vice president of global supply chain and compliance at Top 40 supplier HPG (asi/61966). "With the steamship lines taking full advantage of the pent-up demand in the U.S. for product, our theory keeps freight costs in this high range through the end of the year," says Bhavnani. Others think container costs, finding a space for the container on a ship, and the price of that space on vessels will actually be at or near their worst in early 2022. "December and January will be very difficult in terms of ocean cargo," says Nanus. "With the Chinese New Year holiday very early next year, vessel space will be extremely tight and crazy expensive. There's a need to plan as early as possible to avoid delays and price increases." Inventory Aggravation Even when suppliers secure containers and spots on ships, it's taking longer to get product to North America and then stocked in warehouses, ready for sale. Congestion at ports, foreign and domestic, has been one reason for that. So has backlogs that have caused rail and truck deliveries to slow. COVID protocols and labor shortages have contributed to both those delay-driving factors. "Pre-COVID, normal transit time by vessel from China to LA was 14-17 days; now it's 30-35 days," explains Nanus. "Normal transit time from China to New York was 27-32 days; now it's 45-60 days. For suppliers not located on either coast, the rail is a huge issue, as it is now much harder, longer and more expensive to bring goods to their warehouses." While suppliers report that delays at domestic ports have somewhat eased, there's potential trouble brewing abroad. "We're going to start seeing a major shortage of goods." Trevor Gnesin, Logomark Consider: Yantian Port in the export and industrial center of Shenzhen in southern China stopped accepting containers for export through Sunday, May 30, Bloomberg reported . The container yard of the port was partly shut after an outbreak of COVID-19 among port staff and in the surrounding community. The outbreak has compelled Yantian, one of the planet's busiest ports, to enact stricter virus control measures, which could further slow the flow of shipments. "Any delays will likely put further pressure on the already sky-high costs of shipping goods from China, which have soared on record export demand, a shortage of containers and other factors," Bloomberg reported. The drag on exporting from Yantian - and other ongoing delay issues - could further impact promo's inventory, some industry executives believe. "We're going to start seeing a major shortage of goods," opines Trevor Gnesin, CEO of Top 40 supplier Logomark (asi/67866). "Consider that for the busiest quarter in the promo market - the Q4 holiday gift-giving quarter - those items that are ordered in September or October won't arrive until December. Then they'll have to be unloaded, decorated and packed. And let's not forget the domestic shipping challenges we saw in Q4 of last year. This ‘perfect storm' is shaping up to be bad, and not ending any time soon." Gnesin's alarm bell comes as suppliers are already struggling to keep inventory levels sufficient because of the importing challenges. Sure, nimble firms like Top 40 supplier Polyconcept North America (PCNA, asi/78897) are adapting, reorienting forecast models to account for longer lead-times, adjusting inventory assortment to match shifting demand patterns in products, importing more inventory than normal, and aggressively ramping up stock levels of best-selling items. Certain suppliers, including PCNA and AAA Innovations, say such practices have helped greatly improve their inventory situations. Still, it doesn't mean gaps in stock won't occur. "The challenge is around replenishment," explains Polyconcept Vice Chairman David Nicholson. "What used to be a 60-to-90 day replenishment cycle is now taking as long as 120 days given the raw material shortages and shipping delays. For a given item that realizes a sudden spike in demand, we simply can't back-fill the inventory quickly enough. With demand strengthening on top of the seasonal uptick in Q4, I suspect inventory will remain a challenge for suppliers through the balance of 2021." Inventory shortages have impacted distributors, many of whom say they've had to exercise more sourcing dexterity than ever before to find products to match client needs. "The bulk of our issues stem from disruptions to the supply chain inventory," shares Whitaker. "Nearly every apparel order we present pricing for, we're saying ‘this is as of right at this moment.' And that makes it all the more challenging for pre-order situations too. We've had more inventory swaps than ever in the last few months." Rising Material & Labor Costs, Currency Woes As Nicholson alludes to, raw materials have been another thorn in suppliers' sides. Certain materials needed to make product are harder to come by - think electronic components for tech items, for instance. Relatedly, costs for raw materials are increasing. "Steel as a commodity has seen the largest increases but we have also seen wood, polyester and corrugated increases as well," says Nanus. PCNA, like many suppliers, is experiencing higher costs for core raw materials, as well as delays for key components used in products. "The most notable cost increases have been driven by higher oil and metal prices - plastics, stainless steel, polyester fabric. We're also dealing with cost and supply issues for many of the components used in our technology products," related Nicholson. While some analysts think steel could come off its highs in June , suppliers say that in general it doesn't look like costs for materials are ready to decline significantly yet. "Material costs continue to rise across multiple categories," says Jonathan Isaacson, CEO of Top 40 supplier Gemline (asi/56070) "These increases include stainless steel, fabric (polyester and cotton), as well as packaging." The raw material costs matter because they drive up what suppliers pay to manufacture products that range from T-shirts and drinkware to tech devices. Those cost pressures come amid the soaring freight expenses and two other important factors that are causing supplier's overhead to inflate: Rising labor costs and the declining value of the dollar against the yuan of China, where the vast majority of promotional products sold domestically are produced. A year ago, the U.S. dollar was worth about 7.11 yuan. Currently, $1 equates to about 6.37 yuan, meaning the dollar isn't getting you as much these days in China. "We're seeing an increase in costs from products or components made in China because of currency fluctuations," says Bhavnani. Adds HPG's Rong: "Rising raw-material costs and currency exchange rate pressure is driving cost inflation." So are those aforementioned labor expenses. While it's not an issue for every supplier, more than a few have reported to ASI Media that it's proving difficult to hire adequate staff domestically to keep up with demand - a reality affecting sectors beyond promo as well . "As we ramp up production to meet growing demand, job openings at all our locations are taking much longer to fill compared to before, particularly in lower-skilled areas where competition is fierce," reports HPG CEO Chris Anderson. To attract and retain workers, suppliers are increasing compensation. Even as they do so, it's been difficult to beef staffing levels back up to par, which creates operational challenges such as diminished responsiveness to customers and longer lead times for order fulfillment. "We're aggressively working on new recruiting strategies," says Nicholson in an assertion many suppliers conveyed. "At the same time, we're also focused on automation and efficiency programs to reduce the impact of the labor shortage and to expand our available capacity." Product Price Hikes & Distributor Impacts As a result of rising overhead, suppliers have been increasing prices on the products they sell. It's not, many suppliers insist, a cash-grab aimed at making up financial ground lost during COVID, but rather a regrettable necessity aimed at keeping the companies viable. "In the face of rising costs, HPG first looks at options to increase efficiency or offset cost increases via internal adjustments," shares Anderson. "When all other such options are exhausted, we then pass along a price increase. For 2021, the impact has varied by category and, on average, has resulted in price increases in the low-to-mid single-digit range." AAA Innovations has increased prices on all goods affected by freight and raw material cost spikes, says Nanus. "Our outdoor items have seen the greatest impact," he adds. Distributors are noticing. More than 9-in-10 agree with the statement that apparel and hard-good prices have increased noticeably over the last six months, ASI research shows. "We've seen increases on prices across the board," says Jo Gilley, CEO of Top 40 distributor Overture Promotions (asi/288473). "Name brand apparel has been particularly bad." The price hikes might not be done yet. If supplier overhead continues to soar, further adjustments could be forthcoming. "We implemented a price change in April to account for the higher shipping and raw material costs impacting most of our product categories," relates Nicholson. "Given the current environment, it's likely that we'll be forced to look at another round of price increases in the fall. Unfortunately, we don't see much changing to alleviate the situation in the near-term." To soften the blow of price increases on end-buyers, some distributors report that they've been working hard to educate clients about why product costs are going up. Others say clients have generally been understanding without much education because they're already aware of inflationary pressures. Some distributors admit they've chipped away at their own margins a bit to stay more competitive. "As I witness our sales and operations teams get creative to serve customers and solve problems, I believe that is happening throughout the promo industry." Jo Gilley, Overture Promotions. As they steer through the challenging marketplace, certain distributors have expressed anger at what they say has been declining service levels from suppliers, whether it pertains to fulfillment/production times and/or inquiries related to orders. Others say they understand suppliers are dealing with staffing issues and that those are a likely cause of the erosion in service, but also note that comprehending the reality doesn't erase the fact that it adds complexity to the sales process. "It has been challenging to get a hold of someone to confirm pricing, ask questions about item options, do inventory checks and get turnaround times on things as it relates to pre-sale," shares Whitaker. "That's an issue for us when we look to solve things quickly for customers, who have come to expect everything is available at their fingertips. We tend to gravitate toward recommending the suppliers that have real-time inventory, shipping quotes and very detailed charge information on their websites." In a similar vein, Gregg Emmer, chief marketing officer at Top 40 distributor Kaeser & Blair (asi/238600), says it's been near impossible to obtain firm commitments on delivery and "price quotes are given with much smaller time windows." Despite all the issues, there is positive news. On the whole, distributors say that the rising prices and supply side challenges haven't derailed the sales recovery they're experiencing. "We've had to find great alternatives when first choices aren't available, but our trend is up with both order counts and sales volume," says Emmer. "I'm optimistic," adds Gilley. "As I witness our sales and operations teams get creative to serve customers and solve problems, I believe that is happening throughout the promo industry. We work around, we create alternatives. And, right now, we tell our customers to plan further ahead, months earlier than usual." Marc Simon, CEO of the industry's second largest distributorship HALO Branded Solutions (asi/356000), expressed similar sentiments, saying he doesn't believe price increases and stock issues will prevent promo's rebound in 2021. "The industry offers thousands of products which provide excellent advertising value," Simon notes. "Buyers have a great deal of products and ideas among which to choose, and they will choose promotional products as more businesses continue to open and re-start their promotional efforts as the pandemic wanes."

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