Rocky road to the holidays
The end-of-the-year holiday shopping season is off to a rocky start, with a shipping crisis causing products to be delayed, unavailable or more expensive. Then, there are the truck transport shortages, slowing the movement of goods already here.
What are the present realities and prospects for the second holiday shopping season affected by the pandemic? Discussing it all are Michigan Ross professors Ravi Anupindi and Jun Li. Anupindi is a professor of technology and operations as well as founding faculty director of the Center for Value Chain Innovation, and Li is an associate professor of technology and operations.
What exactly is going on as far as supply chains and shipping problems, as it pertains to consumer goods?
Anupindi: On the supply side, there are disruptions due to a multitude of factors, including shortage of raw materials, components, labor, congestion in shipping lanes, shortage of manpower in domestic transportation and logistics. On the demand side, we’ve already entered into high season even in normal times (holidays) but now (in 2021) exacerbated by businesses ordering more to replenish inventories, hedging by over-ordering due to longer supply delays and disruptions.
Consumers, flush with money they did not spend last year, want to splurge. This is the classical bullwhip effect that ceases to stabilize as the supply chain is being subjected to multiple shocks.
Li: The global supply chain is experiencing problems everywhere. We are seeing significant supply chain delays caused by supply shortages, transportation delays and demand swings. Manufacturing activities have slowed down worldwide during the pandemic.
Adding to the problem are port worker and container shortages, straining transportation capacity and causing significant delays. It now takes twice as long, or even more, to ship from Asia to the United States, as compared to the pre-pandemic time (over two months vs. a month). Further adding to the chaos, retailers are all trying to restock the inventories depleted during the pandemic in preparation for the holidays, tying up vessel capacity and further pressuring the already fragile supply chains.
So both the current picture and predictions are, to say the least, messy for holiday shopping as far as availability and pricing of products. Are those concerns overblown, understated or spot on? Is any progress being made?
Anupindi: It’s not overblown. We’re already seeing higher prices in general and especially for hard to find popular products. I think it is going to get worse as we approach peak holiday shopping. Let’s wait to see what happens during this Thanksgiving weekend.
Retailers are scrambling to improve availability but alternatives are limited. The Biden administration has asked the Los Angeles ports to operate 24/7. That may help somewhat but congestion is further downstream: Containers need to be moved out of the ports, which means we need trucks and drivers.
Li: We already see higher prices. E-commerce prices increased significantly from year to year during the pandemic time according to Adobe, reversing a longtime decreasing trend. We should probably expect more stock outs, higher prices and longer shipping delays as the holiday season is approaching.
As ports and vessels are caught in bullwhip effects and becoming the bottleneck, some big-box retailers (such as Home Depot, Costco, Walmart) responded by chartering private ships to restock their critical supplies from Asia. Twice as expensive, private charters give these retailers greater visibility into their ocean shipments and assurance of timely delivery. However, consumers would likely end up paying for these costs.
Where does the pandemic fit into all this? Was it the catalyst or complicating factor?
Anupindi: I would say it was a catalyst and also a complicating factor. It’s a catalyst because it created the initial disruptions in supply. While we now have a solution in the form of vaccines, it has become a complicating factor due to very unequal response and access to vaccines across the world. Developed countries (consumers) are recovering and recovery (rise in demand) has been faster than anticipated.
At the same time, many of the countries we import from (Vietnam, Bangladesh, Cambodia) haven’t had sufficient levels of vaccinations to resume normal production. While vaccination rate is high in China, it is also overcautious shutting down ports, for example, for the slightest breakout of infection. Within the United States, workers remain hesitant to come to work; attitudes toward work have shifted due to the pandemic and workers seem to have options; some are quitting in response to vaccine mandates, creating worker shortage in many sectors reducing capacity.
Li: The pandemic is the root cause of all—productivity slowdown, worker shortage, port congestion, demand uncertainty, you name it.
While global supply chain disruptions are not uncommon in the past two decades (2011 Thailand floods, 2011 Japan earthquake and tsunami, and 2012 Los Angeles and Long Beach ports shutdown), the problem we are facing now is unprecedented—almost never in history that both supply and demand are hit at the same time. While consumer demand comes back relatively quickly after the economy reopens, supply chain capacity (ports, trucks, vessels, plants) only rolls up slowly. This creates a major mismatch between demand and supply, further causing retailers to panic and inflate orders, sending the whole system into a downward spiral.
What could be the long-term impact, positive or negative, from these crises? Is there hope for improved logistics? More domestically made products? Fanciful thinking, perhaps, but might consumers buy less stuff and/or expect what they do order to take longer to arrive?
Anupindi: Supply chains will adapt and companies will pay more attention to the challenges of operating globally extended supply chains, which are often completely outsourced. So we can expect to see some redesign to shorten supply chains and make them more resilient, such as by having alternate sources and less outsourcing.
Omnichannel commerce is here to stay. We have seen a dramatic shift to e-commerce during the pandemic. This forced transition has made (even hesitant) customers more comfortable with online. So this shift will have implications for retail, fulfillment models
Logistics congestion will ultimately improve, but not until early next year.
I am not sure people will buy less and companies also wouldn’t want them to buy less, either. I am also not sure that people will expect to wait any longer in the future. They have already tasted fast delivery and like it. While the holiday shopping may put a bit of pause to such expectation, ultimately, competitive dynamics will move us in the direction of even faster deliveries, not necessarily because we need it but business will compete on it.
Li: I’d like to think it is long-term positive. Any challenges we face eventually become learning opportunities. Industries and governments alike are reconsidering their global supply chain footprints, and more importantly, risk management strategies. It may also motivate a whole new industry focusing on providing risk management tools and services targeting critical nodes and links in global supply chains. We are already seeing much innovation from retailers during the pandemic. It is time for more innovations throughout the chain.