What’s Driving the Supply Chain Crisis, and How Distributors Can Navigate It

On a recent episode of Wholesale Change, Distribution Strategy Group (DSG) spoke with Helgi Leja, senior director at Distribution Performance Solutions, and Bruce Strahan, managing partner at global management consulting firm Argon & Co., about managing through a supply chain crisis like the one we are facing right now. 

DSG: What are some of the issues you’re hearing? What are the problems people are struggling with?  

Bruce Strahan: It’s about the transportation delays, the cost of ocean transport going up fivefold. Certainly, I think the other side of it, we’re hearing a lot of problems. We’re also hearing a lot of expectation changes from our customers, and I kind of put all that together; it’s not all bad. I think we’re going to come out of this stronger. I think for the companies that have been dealing with this it’s kind of survival of the fittest. So, you kind of deal with it. You learn how to do it better. And then you come out of it with some more hardened ideas about how we do it. 

Helgi Leja: The term lean distribution, lean manufacturing, has been really the mantra of many companies and many strategies along the way. There is a theory right now that lean is a disaster. Because as of right now, because of the leanness of supply chains, the ability to react and to adapt is basically restricted. Especially if you have one component out of, let’s say, Thailand, and you can’t do anything else. You might have your 99 other components, but your one component you definitely need. 

DSG: You’re as good as your weakest link. How does a distributor overcome huge increases in shipping costs to get products from the manufacturer, specifically paying for overseas air freight versus waiting for ocean freight? 

Leja: Air freight is about 20X ocean, for a sampling of cost. So, the last thing you want to do if you’re trying to minimize your transportation cost is air freight. Now we understand the reality is, “Hey, we need product today because we have to fulfill a certain demand.” And so, people are incurring that cost. One of the most effective ways is nearshoring some of these items that are considered critical that are now abroad. 

Think about how complex the global supply chain is. We’re trying to meet a demand for that customer, and I’m just going to say a demand in New York City. But the product that is fulfilling that demand could be in five different countries. The complexity of getting all five of those things to that person, New York City, is probably pushing them to use air freight. I do think distributors are going to have to, require may be too strong a term, but influence their manufacturers to have more localized, regionalized manufacturing because, as we see, the supply chain has a couple of weak links. I think this has been exposed as one of them. 

To answer this question, I think, a push on their manufacturers to nearshore more, manufacture more regionally or more domestically, and that could be Canada, United States, Mexico because that’s an easier transport to coming across the ocean. But the cost, unfortunately right now, is exorbitant. I read recently that Walmart is paying drivers $88,000, which is twice the median salary for truck drivers today because they’re trying to get people. So, you can imagine that cost is going to be passed on to you as a distributor. I think it’s just unfortunately a supply and demand Econ 101 issue where the demand is much higher than supply.  

Now, obviously, we hope within a year or two that it starts to level off, and it becomes more normal or more normalized. But I think right now, it’s just one of those things. If you have to get it there, you’re spending that airfreight number and that airfreight numbers 20x versus comparing across the sea. So there are some nuances there. It’s not an easy answer. 

DSG: Where do you think the ratio will be as we get back to a more normal time? 

Leja: It’s always been more expensive. It was about 8X, and I think now it’s 20. And that includes, keep in mind, that the ships themselves have also increased dramatically. China to the West Coast in the U.S. has gone up 200% since May. If you compound the shipping cost just via container is X amount, and then the air freight is 20X that number. 

DSG: Is that a ship shortage, a container shortage, a labor shortage or all of the above that’s driving that? Or they can charge that because the market will bear it? 

Leja: I think all the above. And they’re starting to build bigger ships. They’re trying to get to 20,000 containers per ship. So, the bigger ship you build, that means you have more product on that ship, that means the ports in the U.S. have to be deeper, they have to have the infrastructure to support that. To unload a 20,000 container versus the normal (8,000-12,000) takes 2.5X longer. If your product happens to be on that container that’s on the bottom of that load, you’re stuck for a while. 

I think you hit them all. I think the right supply and the right location of containers are issues. The changing of ship size to make it bigger, which means there’s more volume coming through. And they’re saying they’re building until 2023. So, there’s a lot more capacity on the way. Labor, as we know, is hitting every single industry, manufacturing, distribution, our industries. Every industry has been hit with labor challenges. And then, of course, you add a bit of COVID to that, and you add some closures, some government regulations, you have some taxes and tariffs, it creates the perfect storm. This is why we are where we are. 

Strahan: A few years back, there was a lot of decommissioning of ocean freight capacity. And it’s going to take a while to build that back up if it ever does. I mean, if they can get everybody to pay this astronomical rate for ocean shipping, why would they build a lot more to make it half that and part of that is going to be driven by the fact that some of the things that we have been buying in other places just doesn’t make the normal model work. 

The idea that taking high cube heavy stuff and producing it in China and bringing it over here at low transportation costs, it’s not that big a deal; but you multiply that by 5X, it absolutely doesn’t make sense. And so, the nearshoring does become more of a possibility just from an economic standpoint. Some of these things are kind of natural changes. They’re going to happen, but they just don’t happen quickly. You don’t suddenly just change your whole supply chain. You don’t suddenly build bigger, faster ships, all those things. 

DSG: It’s getting really hard to do pricing on projects because you can’t rely on what the price is going to be. You also don’t know when you’re going to get the product. And so, the whole quoting and bid submittal process has gotten very, very difficult, whether you’re in electrical construction, concrete construction, plumbing, heating, underground. It’s all very difficult right now because of product shortages and inflation. How will the current inflation correction affect the electrical industry and anybody involved in construction?

Strahan: I think that’s a good thing to talk about. Because if your costs go up, I mean, the first question would be, can we pass it down and increase our prices? Well, that doesn’t work very long. If somebody else that you’re competing with figures out a way to do it better, I think it’s going to force people to think differently about the products they sell. I mean, if your costs go up, and your margins go down, at some point in time, you’re going in the red, and you’re going to have to just change potentially the mix of things you’re selling, which really ends up being an opportunity for the people at the bottom that are very efficient to make things with low margins, even if the cost goes up. So, it is a whole business model change. 

DSG: I think part of it, particular to the electrical industry, is you made a bid last year based on prices for copper. You’re awarded the bid now, and you now have to fill it. I mean, that’s really the conundrum that is very painful for a bid-style business is the lag between award and delivery of the bid versus when the bid was made. 

Leja: Yeah. You mentioned a really good thing. So, I think one of the ways to resolve the issue is a collaboration. And oftentimes, it’s always been a vacuum, right? The distributor only shares so much information with the end customer. The manufacturer only shares so much with the distributor. What I’m seeing right now is another manufacturer saying, “OK, we know we’re going to have demand. Who’s going to buy the demand?” 

One of the suppliers is talking to the big buyers of their products and saying, “What is your forecast for the next 18 to 24 months? And then, they are coming to us and saying, “Hey guys, what is your forecast?” And then we’re going to our customer saying, “Hey, what are you thinking?” I think that collaboration is going to be essential to trying to resolve some of these things. 

We have to have an open conversation with our clients. “Hey, guys, we’re going to have this rebid on Monday, and you got to execute by Thursday.” It’s been an evolving process. We’ve had to rebid multiple projects, basically, every 30 days. It’s not too hard to do because they just add 20% to the previous quote, and you just go from there, but it is a stress. 

But I think as long as you communicate with your client base. That collaboration across all parts of that supply chain has to be one of the three pillars to get us back to normal, in my opinion, and I think the second pillar, which might probably be the most primary pillar is the nearshoring approach. I think we have too many weak links, it’s too global, it’s too hard to respond to demand across the links that we are today. So, I think that’s the second pillar. Now the third, we can all debate. 

To hear the entire conversation about how businesses can manage their way through supply chain challenges and emerge even stronger, watch this episode of Wholesale Change.