Sandy and Holiday Shopping

Sandy is going to affect holiday shopping… I know, you probably say that with many people without houses this is a very minor issues, but not if you livelihood depends on sales you are making during the holidays season.

When a hurricane hits, of course, there is the usual shutting down of shipping terminal and submerged warehouses. Due to the extreme nature of the storm, we saw deliveries being disrupted due to downed power lines, closed roads and scarce gasoline. All of these cause delays that affect every business, but the NY Times article “A Storm-Battered Supply Chain Threatens Holiday Shopping“ brings an interesting angle on the effect of these disruptions on small business, and especially due to the proximity to the holiday season.  The article tells the story of Robert Van Sickle

His pet supply company, Polka Dog Bakery, was relying on a shipment of cardboard tubes from China with a merry design, intended to hold popular holiday dog treats. The products represent about 15 percent of sales at the company. But the New York Container Terminal in Staten Island, where the tubes arrived shortly before the storm, was devastated, and Mr. Van Sickle’s freight forwarder has been unable to track down the containers. It is too late to reorder the tubes from China in time for the holidays, and Mr. Van Sickle has tens of thousands of baked dog treats piled up at his Boston headquarters.

The main issue is that neither an operational hedge nor a (simple) financial hedge helped in this situation. The most common financial hedge is buying insurance. Yet, a regular insurance will cover the cost of the cardboard tubes, but not the finished products, and those payments will not come close to making up for lost revenue.  At 15% of the annual sales, this is a significant fraction.  An operational hedge will be to have a local emergency supplier for cases. Such a supplier will be more expensive, but given the significance of the holiday’s sales, I would expect him to build such a relationship. In stead,

Last week, he was forced to call customers like L.L. Bean and tell them he probably could not fulfill their orders. “Without this product, we’re in trouble,” Mr. Van Sickle said. “I am a business owner and this is pretty much my year.”

The magnitude of Sandy was something that is not easy to prepare for, and especially for small businesses. Yet, the cost of operational hedges (such as having emergency suppliers, spreading orders over several locations) is usually not high.  Many firms do not build these safeguards, not because of cost, but rather due to lack of awareness, and long term thinking. For retailers that depend so much on the holiday season, this seems like a necessity.