US shippers seek clearer view of demand in patchwork reopening

US shippers seek clearer view of demand in patchwork reopening

As they reopen US operations, importers are urgently analyzing demand to gain a clearer picture of what goods need to be ordered and shipped to store shelves. Photo credit: Shutterstock.com.

Businesses in the United States are bringing all the supply chain skill they can muster to reopening as a patchwork, state by state — in some cases, region by region — revival of the US economy picks up pace. They are finding reopening often requires significant supply chain repairs, collaboration with logistics partners, and no small amount of reinvention to adapt to the health and safety needs and changing customer demands of the COVID-19 world.

“We’re now operating over 2,100 stores as mini-fulfillment hubs through ship-from-store and over 500 stores as curbside pickup locations, a capability we launched during the COVID crisis,” Sonia Syngal, president and CEO of the clothing retailer Gap, said June 5 in a quarterly earnings call. Gap has reopened 1,500 stores, she said, well above its 800-store target for the end of May, but even closed stores are being utilized to boost e-commerce sales.

For US retail importers, there is a growing urgency to the reopening timeline. If they need to order goods for the US holiday shopping season, they need to do so soon to ensure containers are loaded on vessels and arrive at US ports in time for goods to make it to store shelves. That window of time is closing in June, and capacity is tightening as ocean carriers continue to cut vessel sailings.

US manufacturers, especially automakers and parts suppliers, need demand to come back, but they also need to straighten snarled supply lines as they attempt to reopen shuttered factories and resume production. US manufacturers source components and raw materials from many countries are also affected by the pandemic, Mexico in particular.

“There are still a lot of companies that are still coming up for air,” David Commiskey, vice president of customer solutions at third-party logistics provider GlobalTranz told JOC.com. “Everyone’s dealt with the shock of the pandemic and now they’re stepping back and locating assets and inventory across the supply chain.” GlobalTranz is seeing delays in less-than-truckload (LTL), truckload, and home deliveries as a result of the shakeout, he said.

What shippers of all types need most is a clearer view of future customer demand, whether those customers are consumers or businesses, to help them determine how much inventory they need, and where it is most needed. That in turn will determine what orders must be placed now and how heavy second-half ocean container and surface freight volumes will be.

“About 25 percent of the companies I work with have an idea of what their demand is going to look like,” Commiskey said. “In certain segments it may be 80 percent and in others it may be 10 percent.”

“The biggest problem is the uncertainty,” said a logistics manager who requested anonymity. “Our factories want to know how much we are going to buy, our vendors want to know how much we’ll order, and our carriers want to know how much volume they’ll get. If I knew what customers were going to buy, it would all fall in line: Orders, containers, truckloads.”

That uncertainty spills over into forecasts for container carriers, which then allocate capacity based on their customers’ demand projections. When volumes of US imports from China unexpectedly spiked in late May and early June, sending spot freight rates higher, carriers said they had matched vessel deployments to customer demand projections, which failed to account for such a surge.

No ‘business as usual’

A clearer view of upcoming demand will likely emerge as more businesses move beyond the initial stages of reopening and reestablishing relationships with customers.

Syngal said the retail recovery is “still in its early days, but we're encouraged by the trends we're seeing. We have welcomed tens of thousands of our employees back to work and expect to have the vast majority of our North American stores opened by the end of June.” However, reopening will not be a return to business-as-usual for Gap, or for other businesses.

“During the crisis, we doubled the way customers can shop with us by expanding our buy online, pick up in store capability to include curbside pickup, as well as a new virtual concierge that Athleta [a Gap retail brand] has begun testing, offering customers the chance to have one-on-one interactions with store associates in the comfort of their own home,” she said.

The acceleration of e-commerce means that reopening, for more traditional brick-and-mortar retailers such as Gap, will not be a return to pre-pandemic ways of doing business.

Companies will need new strategies, especially when it comes to inventory management and distribution, as US and global supply chains undergo a grand rebalancing in the wake of the pandemic and recession, with e-commerce representing an ever-larger share of business. For example, online sales represented 25 percent of Gap’s total sales pre-pandemic. In the first quarter, sales online rose 13 percent, and in May they shot up 100 percent year over year.

“Both inventory on hand and safety stock have to go up,” said Steve Sensing, president of global supply chain solutions for logistics provider Ryder System. “The more places you need to store inventory, the more inventory you’re going to need.” And Ryder’s shipper customers are storing more inventory in more locations, especially at sites closer to stores and consumers.

“What we’ve been seeing over the last couple of years is our customers need more ‘nodes’ to store inventory,” Sensing told JOC.com. “It’s all about speed to shelf and speed to home. The more nodes you have, the more effective you’re going to be.” Those nodes could be stores, small warehouses, or larger distribution centers, including shared locations,” he said.

“We’ve got three multiclient locations, and our vision is to extend those nodes to about another five to seven locations over the next 12 months,” said Sensing. “It’s all about density. All that COVID-19 has done is accelerate that. I don’t see it going backwards. People who have had to order more and more goods online while staying at home are now comfortable with it.”

Retailers such as Gap, with multiple brands and outlets, have several streams of inventory to manage. The goal is still to match inventory as closely to demand as possible, Gap CFO Katrina O’Connell told analysts June 5. “Inventory is the foundation of our business, so we need the right items in the right locations to support demand or we will not win in the market,” she said.

As Gap prepared to reopen stores, the company took three steps to reduce excess inventory. First, the retailer wrote down spring inventories “trapped in closed stores” that are now “seasonally irrelevant,” donating a portion of that inventory to charity. Second, Gap expanded its ship-from-store and buy-online-pickup-in-store programs to reduce inventory held in stores.

Third, Gap adopted a “flexible pack-and-hold” inventory strategy. “Summer and fall inventory that we will be unable to sell due to store closures and potentially lower demand will be held until next year’s selling season,” O’Connell said. Storing products will raise costs, but not as much as trying to sell off goods through massive sales and discounts.

Another retail logistics manager, who asked not to be identified, said visibility technology and business analytics are now required to not just track shipments but manage the flow of inventory during the COVID-19 recession and reopenings. “The emphasis on having the right data has gone up because without it, we can’t make decisions,” he said.

As it prepared to reopen more than 100 stores, the retail logistics manager’s company took stock of its stranded inventory — whether in container yards, at inland rail ramps, dropped trailers at factory parking lots, or LTL terminals — and began running scenarios to control inventory flow as demand came back online.

“We needed this data,” he said. “Add it all up and it translates into truckloads and containers.”

His scenarios showed that “stretching” a supply chain by lengthening the time goods that are in transit might be necessary to prevent too much stock on hand and congestion at ports or inland transportation pain points such as rail ramps if demand returns slowly. That could mean diverting cargo from one US port to another and using different inland transportation modes.

“Stretching out delivery times could be good, if you have the visibility,” he said. “If goods are selling more slowly at stores, you can ship a container with replenishment goods through New Orleans rather than Los Angeles, so the ocean transit time is 43 days. That would give you more time to sell goods still on store shelves.” 

Barriers to re-entry

While companies such as Gap are moving quickly, many are still in the early stages of reopening. As Commiskey pointed out, they are preoccupied with how to create a work environment safe enough to draw back employees concerned about the dangers of a pandemic that has not gone away. They are sanitizing surfaces and enforcing safe-distancing protocols in stores and on factory floors.

On top of that, the non-uniform nature of the US restart, varying from state to state and across many municipalities, adds a thick layer of complexity for logistics managers. A factory may reopen in Georgia, but suppliers in California or Oregon may be closed. Customers in Michigan or New York may not be open to receive shipments, or only open for restricted hours.

Shippers also need to know which transportation partners, suppliers, vendors, and customers are open. That can be hard to track, and attempting to do so provides a clear reminder that domestic supply chains are as tangled and interconnected as international ones.

Companies that maintain close links with suppliers and customers are better positioned for recovery, but immediate needs can be overwhelming. “Getting PPE [personal protective equipment] is a focus of a lot of the supply chain people I’m in contact with,” said Jim Monkmeyer, president of transportation for DHL Supply Chain North America.

“We’ve had meetings cancelled because people are working 24/7 just to get that PPE and keep their businesses running,” he said during a media briefing May 29. “Their manufacturing facilities are starting to open back up, but they have to be cleaned before workers return. And most of our customers are extremely cautious about getting together face to face.” 

As they reopen, some businesses are making substantial changes to their transportation operations, not to save money but to ensure employee safety. “We had one shipper customer who wanted to reduce the number of trucking companies calling at one of their manufacturing and distribution sites, where they had a case of COVID-19 infection,” Commiskey said.

“They had seven to nine carriers coming to that facility on a daily basis, and they said 'what if we go to one carrier?'” the GlobalTranz executive said. “Going to one carrier would have been a 75 percent increase in costs at that one facility. We devised a plan with three carriers and distribute the volume, and their costs went up only 3 percent. There’s a lot of rebalancing going on.”

Short recession, long recovery

Reopenings are taking place in a slow recovery. The next few months may look better than the second quarter, which likely will be the epicenter of a “short, sharp recession”, according to Nariman Behravesh, chief economist at IHS Markit, the parent company of JOC.com. US real gross domestic product (GDP) will likely fall “a horrific 45 percent” on a quarter-over-quarter basis in the second quarter, and drop 9 percent for the year, he said in early June.

“We are not going to regain the levels of economic output we had in 2019 until 2022 at the earliest,” Behravesh told IHS Markit executives. “The damage has been too horrific.” Unemployment will peak just under 20 percent, he predicted, but will still be above 10 percent at the end of 2021. That is likely to suppress consumer confidence and spending as the US recovery progresses.

He believes the recovery may not look like a “V” or a “U,” or even a “W,” as some analysts have suggested, but a square root symbol — i.e., a dramatic decline, a resurgence as businesses bounce back, and then a flat line as the initial surge in demand fades. That scenario is not radically different from the one the US economy experienced from 2009 through 2011 as it moved from recession to recovery and then to slow growth.

“Regardless of the recovery pattern, there will be volatility likely in freight flows and access to capacity,” Steve Raetz, director of research and market intelligence at C.H. Robinson Worldwide, said in an interview with JOC.com. “Demand planning is more difficult in this time and through the recovery than in what we might call normal times. As such, capacity planning becomes more difficult also.”

That capacity planning will require greater collaboration among supply chain partners, and that will be a long-lasting result of the COVID-19 pandemic and recession, Commiskey said.

“We’ve seen a lot of people who were price-driven buyers all of a sudden become much more collaborative and they’re leaning on analytics technology,” he said. “There will be much more emphasis on visibility. The pandemic has forced some customers into a more collaborative mindset that wouldn’t have emerged in a ‘normal’ recession with low freight rates.”

“This has been a true wake up call that it’s time to assess what the risk is in my supply chain,” he said. “We have to come up with strategies beyond contingency plans.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.