To say that the supply chain is in shambles would be a massive understatement. With freight costs at sky-high levels, floods and Covid outbreaks causing cascading delays and shipping container and labor shortages choking up once frictionless pipelines to get goods on shelves, the retail industry is being stretched to its breaking point.
“These are unprecedented times that require very candid, hard conversations,” Sourcing Journal founder and president Edward Hertzman said at Sourcing Journal’s Sourcing Summit on Oct. 19. “There are so many variables and headwinds challenging our businesses and they’re all happening at once.”
Navigating this morass of uncertainty is a “test of all your faculties,” admitted Avdhesh Sharma, group CEO of Asmara International Limited, a clothing manufacturing and sourcing platform that operates in Bangladesh, China, India, Myanmar, Spain, Turkey and Vietnam. “It’s logistics—both inbound and outbound—lockdowns in factories, high absenteeism, travel restrictions, rising material costs—just all of this put together, and yet you have to meet your deadlines. Crazy times.”
The relationship between buyers and suppliers has also undergone a dramatic reversal. The pandemic’s first wave triggered widespread quarantines in Europe and North America, forcing factories in the global south to scramble to deal with the spike in order suspensions and cancelations. Now, countries that were relatively unscathed by the flare-up in infections are being ravaged by the fast-spreading delta variant. “It’s the other way around this year,” Sharma said. “It’s the supply chain that is affected, while the consumer markets are open.”
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Khawaja Munir Mashooqullah, founder of M5 Groupe, one of the world’s largest global supply chain manufacturing and management companies, appealed for optimism, however. With India, Bangladesh and Vietnam emerging from their darkest days, he assumes that there will no longer be any more interruptions. “I just want some positivity in the industry right now,” he said. “Covid-related closures—and I hope I’m right—should not be an issue going forward. Hopefully, inbound and outbound travel will start opening up by the end of the year.”
Still, continuing to engage with fellow supply chain partners remains crucial, Mashooqullah said. Suppliers might be lured by the prospect of a better offer on their materials or products, while buyers might be tempted to ask for a discount if a shipment is delayed. The important thing to realize, he said, is “everybody’s taking a hit and no one is smiling.”
Most of the merchandise M5 Groupe produces is on a Landed Duty Paid basis, meaning it has had to shoulder the bulk of shipping and delivery costs so far. Though retailers that are “more price-sensitive” have been “very cooperative” in sharing some of these costs, Mashooqullah pointed out that participation will usually depend on the cost of freight versus the container’s Free on Board value.
“If the FOB value of the container is $50,000, and the freight has gone from $3,000 to $15,000, there is participation [in cost sharing], but if your container value is $100,000, $120,000, then there is a question of participation,” Mashooqullah said, adding that he expects freight costs to plateau at some point.
Sharma agreed that it’s important to have “strategic” partnerships rather than “transactional” ones. Demand is currently outstripping supply, but the pendulum is always swinging in the opposing direction. “It’s anybody’s guess what will happen if [the tide turns again],” he said. “Examples abounded in 2020—I doubt it’s going to happen again, people are much smarter now, [but] apprehensions are there.”
What’s certain is that sticker prices are going to go up because they have to. “It’s not just FOB or raw materials or freight; there are front-end costs that are changing, too,” Mashooqullah said. “Wages are going up, there’s congestion at distribution centers—all these things add up. Those days of deflation are over; there’s no one else to pass on the cost to. There are no margins left.”
At the same time, consumers will only fork out more is if there’s an uptick in innovation, Sharma argued. “Increasing costs is a reality today and there’s no way that you can get around it,” he said. “[But] there’s no way that you can command higher prices for like-for-like products anymore. You will need newer, more value-added products.” Another issue? With the costs adding up across the value chain, “there’s no way” that no one company will be able to swallow them all.
“Like I said earlier, I’m a firm believer [in] strategic partnerships,” Sharma said. “And if you have the right set of partners in your value chain, these costs will have to be split and shared, and there is no way that a single party or one stakeholder can absorb those costs.”