THE GREAT SORTING OUT ....

The Great Sorting Out.

For the last few years we have waited for the “Great Reset” – and finally, at long last - we are starting to see the signs of a supply chain recovery.  Port backlogs are dropping, inventory is more available, retail sales to inventory ratios are starting to line up, and a bit more personally, the refrigerator I ordered 9 months ago finally arrived.    There will be much debate about the reasons for the eventual reset – (energy prices, shifts back into service consumption, Ukraine war etc.)  but consumer demand is starting to ebb that should  eventually ease congestion at all points within the supply chain.     

So, what is next ?  If my own experience curve is a guide - I believe we are going to see a great “Sorting Out”.   Hints of this sorting are already emerging; recent business articles have Target and Wal-Mart selling through excess inventory that arrived too late for the 2021 holiday season, and bookings of all sorts, from ocean freight, to paper industry orders are trending down.  And in an oddly important way - carriers are now reaching out to me to sell their business after being oversold for the last couple of years.   The North American supply chain is in a weird transitional place.

Experience offers me a few lessons learned.  I worked for a consumer goods company during #maria – and we lost production for a few weeks and incurred considerable stock outs as we slowly limped back up to speed over a six-month period of time.  A supply disruption impacted our demand.    We cut orders,  prioritized demand to core items,  allocated limited supply, while also trying to  build inventory of any type we could.  As power and labor were insecure, we tried to maximize scarce resources.  We also shifted production between manufacturing plants, as well as  to contractors.  We responded with tremendous agility.  It was a great supply chain lesson to learn.   Yet, in the aftermath - and after achieving full production volumes.  We had a mess to clean up and sort out.  I believe this “mess” offers a lot of guidance of what to expect today.

No doubt, everyone talks about how supply chain should or might evolve post-COVID – with simpler product offerings, more risk assessment, improved supplier depth and diversity, coupled with near and reshoring activities.   These are bigger picture and more strategic projects.   Some of these projects can be planned and can even start now – but the time to completion is measured in month and years, not in days and weeks.  I do think it is important to focus on what happens in between now and the future state of the supply chain as it will help to stabilize our current state and allow a clearer picture of the future.

Here is what I expect to during this "in between" state – especially over the next year:

1)    Inventory of all types will be a mess – in particular raw and pack materials.  Years of delayed and partial shipments due to COVID have created significant mismatches of raw and components.   It is hard to make 1000 units of body wash, as an example, when you have 800 labels, 150 caps and 750 bottles.  I was in a similar place post #maria and I remember trying to complete the mismatches, and when we could not – we had to make hard decisions on unmatchable inventory – sort of like throwing out socks that do not pair off.   We worked the problem the best we could – but we eventually disposed of many of these mismatches.  It will take time – but the sooner these mismatches are resolved – the more you will feel in control.   Hint: look to target inventory items with no MRP activity over a six to twelve-month time frame.  

2)    Finished goods inventory will feel out of control - During #maria – we built whatever inventory we could expecting diminished capacity due to serial power outages.  In the early months of COVID we did the same, expecting personnel outages due to illness.  When #maria impacts leveled out- I found myself with either too little or too much inventory.  If we believe the aforementioned news reports suggesting that major retailers are discounting heavily because of excess inventory, it is logical to assume some of the manufacturers are also sitting on a lot of inventory.    While the discounting approach will appeal to bargain shoppers, it is not without risk  as it may cannibalize future demand and alter point of sale data. Imagine for a moment the impact of selling sweaters on deal in June - on the demand for same in November.   Handling excess inventory is always a challenge with few great outcomes,  so knowing your consumer / customer is always key to making the best decision.   Hint: set a wellness index that counts the weighted % of items below six weeks of forward coverage (or whatever works best for your business).  Do something similar for excess inventory.   Doing both will help dimension the issue within your business and give you a tracking KPI for improvement.  Also, consider rebalancing finished goods inventory within your distribution network – especially for B and C SKU’s.

3)    Obsolete and distressed inventory will come into focus.  COVID brought with it a lot of SKU rationalization, delayed product launches, changes in packaging messaging, and even COVID specific products.    COVID also impacted products with short expiry windows, seasonal products, fashion / trend-based,  or time sensitive products.  During my post #maria experience, it felt like it took a couple of years to discard all the old raw materials and packaging for formulations and packages that we abandoned.  The result is likely  a lot of dead end raw and pack materials, and obsolete finished goods. This will mean a lot of write-offs or sales into distress channels.   Hint: assemble an excess and obsolete team to address these items soonest if for no other reason than to clear warehouse space. Create reporting to slice and dice inventory data, consumption rates, coverage levels, and pending expiration.   Consider offshore distress channels to prevent brand dilution.

4)    Return activity may increase – it would not surprise me if abnormally high percentage of product purchased during the flurry of COVID is returned, and I suspect there will be pressure to do so throughout the supply chain.  The most likely candidates are those products or raw materials with relative short shelf life, or COVID specific products (such as hand sanitizer). Return policies will be tested to the limits.   Hint: update your return policies to make sure they are clear and have onerous restocking charges, make sure reverse logistics and any special handling are not on your dime. And only issue credits, not refunds.

5)    Orders will be cancelled or postponed.  Nearly everyone over ordered during COVID – or extended coverage forward.   As inventory and demand corrects, so will orders. And if a recession takes hold, this cancellation or postponement will become more pronounced.  Which will help make demand planning work even harder.  Hint: update your terms and conditions to include cost recovery on cancelled or postponed orders where you have already committed to supply.  A purchase order is a commitment and should be recognized and enforced as such.

6)    Warehousing will be (is already) congested.  Heightened demand, lots of just in case inventory, bullwhip inventory, excess and obsolete, and lots of overbuying has filled North American warehouses to the roof.  The recent improvements in port clearance, coupled with a slowing of demand only served to fill the warehouses even higher.  Hints: clean up inventory as mentioned in #1-#3 to free up additional space.   Lower your inventory coverage on low volume items not selling to high fill customers.  Secure space now for holiday season.  

7)    Expect your customers to want adjusted pricing.   COVID directly or indirectly has led to pricing increases.    With reduced demand, commodity and service pricing should fall.  Baring anything unforeseen,  it is reasonable to expect some eventual price deflation.  No doubt some of the most cost focused organizations will watch these trends and quickly ask for pricing concessions.  Why? Because they take note – they track commodity costs routinely.    I don’t expect all product pricing to decline right away – but you should not be surprised if your customers start asking for pricing concessions.   Hint: track your own 20-25 base commodity prices to help gauge the impacts on your cost structure.  Know your supply lead times for most items – as commodity changes today are latent relative to your lead time.  A little bit of information on your side of the bargaining table will go a long way.

8)    Demand planning will still be very, very hard.   Finding the right baseline for forecasting – especially statistical forecasting will be as difficult as you can imagine.   You will be asking what true demand is and how you should treat all of the demand anomalies you observed over the last few years. You will see incongruous point of sale sell through on heavily discounted items sold within last year.  You will have future demand disappear as orders cancel.   You may have to tune your statistical models  to ignore some of the initial COVID volatility – and it may make sense to increase outlier sensitivity to further smooth and ignore anomalous past events.    Order cancellations on the back end of COVID will only make matters worse – and of course, a recession will make this ugly.   Hint: always ask the question – what do we know now?  What is the current point of sale, or shipment or order backlog data telling us…? How much inventory is in trade (and where)  What is our end consumer experiencing right now ? And make sure you are kind to demand planners – their job is about to become even more difficult.

9)    Manufacturing organizations (most of which worked full tilt for the last 2 years) will de-compress – and possibly lose their way.  One of the better decisions made post #maria  was to implement a schedule attainment meeting with the plant to focus and keep them on task as we sorted through inventory.  Hint: work with the manufacturing plants on mis-matched raw and pack inventory.    Inventory space at a plant comes at a premium and cleaning up the loose ends of inventory as mentioned in #1 will help them feel like progress is being made.

10) Logistical costs will come down.  I believe we are in the beginning of a freight recession.  Once containers rebalance between east and west, and logistical issues in North America wane – we will see east-west ocean freight pricing come down.      Hint: look to set up longer term freight contracts with your providers with aggressive service / availability requirements baked in.

As we transition from disaster to normalcy, most organizations will experience some spillover after-effects, a hangover of sorts.  I wish I could say that the listed items are unique or bold thinking or not likely to happen – but I believe  most organizations will face a number of these issues.   I am not sure these can be avoided, but they can mitigated by starting the recovery process immediately.  Don’t waste time cleaning up and shoring up and sorting out your operations.