How the effects of the pandemic move up the supply chain

The novel coronavirus have impacted many business as governments imposed lockdowns and consumers were just generally reluctant to spend. But in a global economy, those effects are not just local. As shops close down on one side of the world, suppliers on the other side also take a hit.

Take the case of Denim Expert Ltd and its founder Mostafiz Uddin who were featured in a recent Guardian article (‘My life became a disaster movie’: the Bangladesh garment factory on the brink, Jun 21). Denim Expert is a Bangladeshi based apparel producer that makes jeans for a number of brands. When the UK went into lockdown, a number of brands cancelled their orders. Between jeans that had already been produced with materials that had been ordered for anticipated future orders, Denim Expert was sitting on over $2 million of stuff it couldn’t convert into cash. The hit they took was just a small part of the toll imposed on the overall industry.

In Bangladesh alone, fashion brands have cancelled an estimated £2.5bn of orders at more than 1,150 factories, with the country’s garment industry seeing an 84% decline in orders.

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Shifting risk in supply chains

It’s been a long time since I’ve written anything on supply chain contracts but a story in the Wall Street Journal caught my eye (Retailers Canceling Apparel Orders Amid Coronavirus Torments Clothes Makers, May 5). Basically it outlines how a shift in the standard contract between retailers and their Asian suppliers has come back to really bite the suppliers.

For reference, think of a retailer or brand in the west who outsources production either directly with a factory or through an agent. The factory incurs the upfront cost of sourcing materials and hiring labor in anticipation of being paid once the goods are delivered. But what happens if the market shifts between the order’s placement and delivery? Like, say, there is a pandemic and no one in North America is buying new jeans.

That’s where the shift in contracting comes in.

Letters of credit, a once-common backstop guaranteeing payment through banks, have faded away in the past decade. Under that payment system, the buyer’s bank committed to pay the supplier once the goods were shipped, ensuring factories were paid without delay or last-minute haggling.

Even in cases of force majeure—when retailers say they can’t pay owing to circumstances beyond their control—banks would generally still be obligated to pay suppliers if the goods had shipped, said Sonja Chapman, a professor of international trade at the Fashion Institute of Technology and longtime apparel-industry executive.

Retailers have moved away from letters of credit, opting instead for an open-account system—essentially an honor system—where factories trust retailers to pay after shipment. Factory owners in Bangladesh said they accepted the shift because they worried that if they didn’t go along, a competitor from India or Latin America would. They also are reluctant to speak up or take legal action because they don’t want to alienate buyers.

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UPS and using contracts to share the risk of building new capacity

Imagine you are service provider and you line up a bunch of extra capacity because your customers tell you that they are expecting they are really going to need you. What should you do when your customers turn out not to have that much business for you?

If you are UPS, you don’t have to imagine. This is a problem they face at the holidays. Retailers want to make sure that there will be space for their shipments on the truck, so they have an incentive to talk up their potential. Of course, no one can tell the future so sometimes their big talk will prove to be just hot air. UPS apparently is thinking of making the initial forecasts from retailer a little more binding (UPS Tries a New Twist on Surge Pricing, May 1, Wall Street Journal).

With the retail world in upheaval, UPS is asking retailers to help pay when the extra space and workers aren’t put to use—or even when the boxes don’t match the sizes that retailers promised earlier in the year.

“If there are variations to the plan, let’s see what we can do, but we should be compensated accordingly,” said UPS Chief Executive David Abney in an interview. He said the charge isn’t meant to be punitive but one element of a broader negotiation with retailers over pricing during peak times.

UPS is apparently also thinking of imposing charges at times beyond the holiday — say for flowers at Valentine’s or when a new product release causes volumes to spike.

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Paying for grocery store shelf space

It’s not every day that you see a video about supply chain contracting, so I cannot resist posting about it:

The video comes from Vox and they have an article that goes with it (The hidden war over grocery shelf space, Nov 22). That article, in turn, was at least partially inspired by a report written for the Center for Science in the Public Interest (Rigged: Supermarket Shelves for Sale, Sep 28, 2016).

The contract in question is a slotting allowance. Slotting allowances are paid by food manufacturers to retailers in order to get items onto shelves. The money is paid upfront and often varies with the number of stock keeping units (SKUs) introduced and the number of stores in which the products will be stocked. The term comes from the act of creating a space — i.e., a slot — for an item in a warehouse or on a store shelf. The origin story is that retailers at some point started demanding that vendors compensate them for the costs they incur in helping launch new products (which often fail). The reality is that the money involved is now significantly higher than the cost of rearranging products. In effect, retailers are selling off their real estate.

So are slotting allowances good or bad for markets and customers?

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Surge pricing for storage space at Amazon

There is a good chance that the last time you bought something on Amazon’s website, it wasn’t actually sold by Amazon. It instead came from an independent merchant, and Amazon just handled the logistics of getting the item to you. That arrangement has an implication that I never considered until a recent Wall Street Journal article (Amazon Prods Its Sellers to Free Up Warehouse Space, Nov 4): By inviting in the additional sellers, Amazon is giving up control of just what is in its fulfillment centers. If a merchant wants to sell miscellaneous crap, that is their business. At the same time, however, that miscellanea potentially ties up space that Amazon needs — or at least could use more profitably on other items. This is particularly true as we head into the holiday season when Amazon should reasonably expect business to be booming.

What is a poor e-commerce giant to do?

How about a little surge pricing?

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What happens when the World Series results in inventory no one needs?

The World Series starts tonight. While everyone in Chicago is focused on the prospect of the Cubs winning the Series, that is not a certainty. The one thing that is certain is that someone is going to lose – and that raises the prospect of a Cub or Chief Wahoo on t-shirt proclaiming that a team won something that they didn’t.

So what happens to t-shirts and other tchotchkes celebrating events that never happened? That was the topic of a recent Chicago Tribune story (Where do losing baseball teams’ postseason T-shirts end up?, October 18). The article itself is a little confused (it very much seems that a paragraph was dropped) but it does layout some options:

Last year, VF Licensed Sports Group required customers who wanted early access to merchandise celebrating a baseball team’s postseason run agree to ship any merchandise with a losing team’s 2015 MLB postseason clinch logos, images or graphics to international nonprofit World Vision. Customers had 24 hours following a loss to get in touch with World Vision to start the donation process, according to a 2015 agreement provided by a retailer. …

Another retailer was sent a revised agreement that replaced the donation requirement with a mandate to ship any items for losing teams back for destruction. …

Retailers who violate an agreement not to sell, advertise or promote the losing team’s merchandise agree to pay $100,000 per breach, according to the 2016 World Series preprinted merchandise agreement.

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The Cubs might win: A supply chain story for championship gear

For those who are not baseball fans, let me give you a quick update: The Chicago Cubs are really good this year. They won over 100 games in the regular season and have now jumped out to a 2 – 0 lead in their best-of-five series with the San Francisco Giants. FiveThirtyEight  has them as the favorite to win the World Series.

If all of that is news to you, you should also be told that the Cubs have, frankly, sucked for a long, long time. They haven’t won a pennant since 1945 and a World Series since 1908. There is even a short story (The Last Pennant Before Armageddon) tying the Cubs winning a pennant to the end of the world. (To answer the obvious question, the World Series is scheduled to start on October 25th. Barring rain delays, the last possible game would be on November 2nd. The US presidential election is on November 8th.)

So if the Cubs make it to the World Series, there will be a lot of excitement around here. If they actually win the Series, Cook County will likely shut down for a month. And that all raises a question: How many Cubs t-shirts can be sold?

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Managing growth in organic food supply chains

Tight supplies occur in lots of supply chains. Pick any industry with rapidly rising demand and you are likely to see at least the occasional glitch in the supply of a key component or input. Still, the setting described in a recent Wall Street Journal article is fairly unique (Hunger for Organic Foods Stretches Supply Chain, Apr 3).

Nature’s Path is among a number of organic-food purveyors taking steps to tackle supply constraints that are hampering the growth of one of the hottest categories of the U.S. food industry. Companies including soup maker Pacific Foods of Oregon Inc. and publicly traded burrito chain Chipotle Mexican Grill Inc.are digging deeper into the supply chain with such moves as financing farmers, offering technical training and hiring full-time headhunters to recruit organic growers.

The efforts are aimed at ramping up organic-food output that has failed to keep pace with surging consumer demand, due in part to the significant costs and risks that U.S. farmers face in converting from conventional to organic farming. Longer-term, the steps could help bring down organic-food prices that have been bolstered by tight supplies, companies say.

According to the article, retail sales of organic food have tripled in the last ten years and that has put a lot of pressure to increase the output of organic products.

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Pay to stay in supply chains

I cut my academic teeth doing work on supply chain contracting. I consequently found a BBC report on pay-to-stay payments interesting (Premier Foods accused over ‘pay and stay’ practice, Dec 5). The subject of the report is Premier Foods, a large UK manufacturer with several food brands. Premier had the chutzpah to effectively ask its suppliers for bags of cash. Here is what the firm’s CEO wrote.

[Chief Executive Gavin Darby] wrote: “We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas.”

He added: “We will now require you to make an investment payment to support our growth.

“I understand that this approach may lead to some questions.

“However, it is important that we take the right steps now to support our future growth.”

But when a supplier raised questions in an email about the annual payments, another member of Premier’s staff replied.

“We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list.”

You can contemplate the lovely Britishness of “nominated for de-list” while watching this video on the subject.

I should note that Premier Foods has since backed off its demand after the negative press following this report (see here).

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How does allocating cars affect competition between dealers?

It’s been a long time since we’ve posted about the roll of allocation schemes in supply chains, but they remain one of my favorite topics. Allocation schemes involve a pretty simple issue: Suppose a supplier is selling to multiple retailers and at some point gets more orders than it has capacity to fulfill. How should the supplier dole out its limited capacity to its retailers? At one time or another, this has been relevant for high tech goods, luxury items and a number of other industries. But one place this almost always comes up is automobiles — newly released vehicles in particular. A hot new release is going to sell at its full sticker price (and maybe more) so allocating new cars is like passing out thousand dollar bills. So how should an automaker approach this problem?

Here is how Dodge is approaching this for its new Challenger SRT Hellcat — a muscle car with more horsepower than a Lamborghini (Dodge Challenger Hellcat dealer ordering begins — with a catch, Sep 9).

Dodge will base Hellcat dealer allocation on the total number of Dodge vehicles a dealer has sold within the last 180 days, including everything from Dart to Durango to Viper, brand head Tim Kuniskis said.

In December, a second allocation calculation will be made based on the previous 90-days’ sales performance, as well as a traditional 30-day inventory turn.

The dealer allocation for the Challenger Hellcat rewards the dealers “that are selling the Dodge brand,” Kuniskis said. “You sell a lot of Darts for me, Journeys for me, Durangos for me, I’m going to give you the rights to this one, too, because this is a halo of the brand.”

After the initial allocation, Dodge will also begin to measure the Hellcat’s days-on-lot and use it as a factor to determine the number of Challenger SRT Hellcats a dealer will get, Kuniskis said.

The longer a Hellcat sits without being sold — as it might if it were to have a $10,000 or $20,000 market adjustment on it — relative to those on other dealer lots, the fewer future Hellcat vehicles a dealer will receive, the Dodge brand boss explained.

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