Today's global supply chain issues can feel incredibly overwhelming for retailers. So, here's how to mitigate risks and keep these disruptions from slowing down growth.
It’s the new year and… everyone is still talking about global supply chain issues. After two years of upheaval, chances are good that you're borderline bored of it all: the omicron variant, zero-covid policies, chip shortages, climate change — to name a few factors that are challenging supply chain resiliency in 2022.
Stories about these disruptions are all over the news, filling up most of your social media feeds. Even your parents are talking about it (they probably shopped early for Christmas and the holidays because they'd heard so much about products potentially going out of stock).
But while you likely don't want to talk about the supply chain breaking anymore, you also know it directly impacts your brand's bottom line and future. So, you can't afford to tune this information out.
Some leaders in the logistic space are calling these disruptions "a global supply chain crisis." And one way or another, every retail brand under the sun has been affected.
For some, this meant the procurement of raw materials became near impossible. For others, their manufacturers closed down temporarily, and the delayed shipments these closures caused led to widespread stockouts.
On a larger scale, these disruptions led to backlogs in container ships and countless fulfillment difficulties popping up. And brands were forced to either find new, creative ways to fulfill consumer demand or disappoint their customers. (The second obviously wasn't a real option.)
So, how can brands manage these issues? First, it pays to understand what's really happening with the global supply chain.
(Spoiler: If you're a brand trying to scale from single digits to $50M+ in revenue, pay close attention. We have a special section just for you below. 😉)
What is the global supply chain?
The global supply chain is the worldwide business network used by companies to coordinate manufacturers, suppliers, and warehousers to source and ship goods and services to customers. Global market information is reflected through the processes and resources that move through the global supply chain.
The global supply chain only works if all collaborating parties from different countries are able to play their critical roles.
State of the global supply chain in 2022
Import-export hubs in China, ports in Long Beach, California, and everything in between, all contribute to this worldwide system. And everyone, from truck drivers in New York to providers of raw materials in Asia matters to the global supply chain.
Today, retail brands are focusing on how this global supply chain impacts the production of physical goods they can sell to customers.
That's because each step in the system takes products one step closer from creation to the end consumer's hands. And retail brands need these links in the supply chain to be reliable, so they can reduce their costs and stay competitive in the business landscape.
No retail brand can take a product from idea to production all on its own. All brands depend on others to make their business work, albeit in different ways.
So, the most important thing to understand about the global supply chain is that if one link is broken, the entire chain is broken. And if the chain is broken, the whole system suffers.
Right now, several links in the chain are very, very broken. And there's still a way to go before it's fixed.
So, in the meantime, how can retail brands deal with the fallout?
5 reasons for global supply chain issues in 2022
To better understand how brands can manage the disruptions, it's fundamental to first grasp what caused the supply chain to unravel and what's causing the aftermath to continue plaguing businesses.
Of course, there's the pandemic, which nobody saw coming. (Well, most of us didn't.)
The pandemic was that kind of black swan event that rarely, if ever, happens. And it came as a complete surprise to the world's economic system and a catastrophic threat to business as we know it. But there were a few issues affecting supply chains even before the pandemic broke out.
Here are some reasons why issues first started and continue to be detrimental:
1. Factory shutdowns
The past two years have seen factories shut down due to COVID outbreaks, sick workers, and lockdowns. This lack of manpower has massively decreased the manufacturing industry's output, particularly in Asia.
2. Reduced access to raw materials
These outbreaks and lockdowns have also caused a decrease in access to raw materials for manufacturing products. For example, India witnessed a shortage of oxygen, which is often used by automakers, because it reserved its oxygen supply for COVID patients.
3. The Suez Canal crisis
The Ever Given blocked the Suez Canal for six days until it was finally dislodged, but, in that short time, hundreds of ships were blocked from traversing the waterway.
4. Climate change
Natural disasters like winter storms in Texas, Hurricane Ida, and frequent wildfires in California affected food supply chains and logistics networks.
5. Port congestion
Congestion at certain key ports shocked retail brands' planning at different points of 2021. June saw a massive backlog of containers in Vietnam. September and October brought more dwell time for containers in Long Beach, California. This particularly affected DTC brands' holiday sale plans.
With all this being said, we can identify these causes in hindsight. But this doesn't guarantee that new causes for supply chain disruptions won't pop up in 2022 and beyond.
The impact of global supply chain challenges
Because the global supply chain is a network of links, all of them feel the fallout when one breaks.
As a result, all stakeholders in the global supply chain are feeling the burn from the subsequent challenges. Let’s walk through how the supply chain challenges affect a few parties of the retail business world: suppliers, retail brands themselves, and consumers.
As I mentioned earlier, manufacturers face labor shortages when outbreaks happen at their factories. The same goes for truckers and companies focused on moving goods from ports to other parts of the country.
This results in reduced output and productivity. As a result, the cadence of new orders and services they are capable of providing is negatively affected.
One of the main ways retail brands can manage uncertainty is by diversifying their manufacturing (more on this later). This means suppliers hit by delays may risk losing customers in the short- and long-term.
Brands face dramatically higher prices to ship their products from manufacturers (usually from China or somewhere in Asia) to the US (mainly to California). Add to that prolonged shipping delays.
This is not a good combination. Costs are up and stockouts are happening more frequently, meaning brands are pulling in less revenue as a result. 🥴
This leads to less working capital on hand to run these businesses. In fact, over one-third of the small businesses that closed in 2021 attributed their failure to a "lack of capital."
And for many that survived, lack of capital is still a growing concern. In a recent Flexport survey, around two-thirds of respondents said that the difficulty and cost of moving goods is the main concern for their business this year.
While some retail brands had the working capital to weather the storm, the financial implication of these challenges had disastrous consequences on some brands.
The global economy has been shaken by COVID-19, but consumer demand has bounced back strong. On top of that, the global market for goods has surpassed that for services.
But shipping delays and their resulting stockouts have left customers disappointed and dissatisfied at times. Overall, though, consumers have become accustomed to longer wait times.
In some cases, consumers are facing higher prices for goods. As shipping costs go up for retail brands, some businesses have found themselves in the situation of having to adjust prices for their business to remain viable.
How long will global supply chain issues last beyond 2022?
The latest data projects the global supply chain issues could last another 2 years, but if there’s one thing we know for sure is that nobody can predict the future.
All the latest projections on when and how these issues will be fixed are guesses and shouldn’t be counted on. Instead, forward-thinking businesses should adapt to this “new normal” as best as possible.
Because now that we’ve experienced how vulnerable the global supply chain is, it’s unlikely it’ll ever go fully back to normal.
Consumers are demanding goods over services, so congestion is not likely to ease too much this year.
Initiatives that would truly move the needle on easing the disruptions—like fulfilling new ship orders, building out ports, or developing self-driving trucks—takes longer than we can afford to wait. And as supply chains become more complex, the effects of disruptions may become harder to unravel.
Here’s what Ryan Petersen, CEO of Flexport, has to say about it:
In other words, it will take a while to understand all the bottlenecks in our supply chains and manage them accordingly. In the meantime, let's dive into tactics and strategies modern brands are implementing to come out of this stronger than ever.
3 strategies to manage global supply chain disruptions
Solving the supply chain crisis isn’t as simple as 1-2-3. But your brand can implement strategies on the marketing, fulfillment, and logistical side of things to lessen the fallout from these disruptions.
Let’s start with the tactics that require the smallest lift to implement: marketing.
While the overall supply chain issues will take longer to resolve, you can implement interim solutions on the marketing side to eliminate the risks posed by stockouts.
These strategies will buy time for supplier shortages and alleviate consumer frustration. If implemented correctly, they can increase brand affinity and grow your customer base simultaneously.
These interim marketing solutions include:
- Back-in-stock notifications: When your products are out of stock, allow your customers to sign up to be notified when the product is available again. Note that conversion rates for back-in-stock notifications are not stellar: between 5-15% is what we’re hearing from our partners.
- Sell on backorder: Using a tool like Cogsy allows your customers to purchase the products they want, regardless of whether or not they’re on hand at the moment. The trick to selling on backorder successfully is setting expectations from the get-go, letting customers know the estimated shipping date on the product page, checkout, and email receipt. Fortunately, these conversion rates for backorders are much higher than back-in-stock notifications—products on backorder sell nearly as well when the products are in stock. This happens because selling on backorder allows you to strike when the iron is hot and convert customer demand the moment they’re ready to purchase.
- Gift cards: When a product goes out of stock, you can offer a gift card instead. This is particularly useful for consumers looking to buy a gift for others. As stockouts increased during the 2021 holiday season, we saw a spike in consumer adoption of gift cards as presents. And offering a gift card for out-of-stock products helps you avoid losing out on revenue.
Some of these tactics will make more sense for your particular brand, consumer needs, and product types. But in general, these marketing strategies help reduce the risk of missing out on converting customer demand.
On the fulfillment side, here are some tactics and strategies put forth by Flexport, a global leader in freight forwarding, in their recent webinar:
- Maximize container space. While you'll never use 100% of the available space inside a shipping container, get as close as you can. Ryan advises rethinking your product packaging to further optimize container use. Failing to do so wastes money for the shipper, reduces the amount of product you get from each shipment, and wastes cargo capacity for the industry.
- Stick to cargo-ready dates. Canceled bookings create havoc for you and the industry as a whole. Coordinate with suppliers closely to ensure they consistently meet their cargo-ready dates.
- Ensure suppliers' factories deliver on time. Around 30% of bookings pre-pandemic had been canceled due to the late availability of cargo. That, in turn, led carriers to overbook their vessels, leading more latterly to challenges with space availability. So, maintain a direct line of communication with your suppliers to make sure they'll meet your bookings on time.
- Prepare for contracts that reward reliability. These new types of contracts will likely pop up in the next year or so. And they might include implementing mechanisms that reward reliable customers—in terms of not canceling purchase orders and fulfilling contract terms—with better rates or access to expedited services.
- Consider flexibility on routings. For example, less-than-container load contracts typically specify a destination point but not a specific routing. A similar approach for full-container load bookings provides more flexibility in delivery, such as avoiding heavily congested ports.
- Access and understand your data. Be attuned to where the bottlenecks are, whether that be at ports, on shipping vessels, or other modes of transportation, including ports or trucks. That way, you can avoid delays where you can.
Historically, brands have moved toward leaner, just-in-time processes. While this is a beneficial strategy under normal circumstances, it's wreaked havoc during this supply chain upheaval.
With no excess or slack in the supply chain system, there's little buffer for things going wrong. To solve for this, brands need to build muscle to act quickly and proactively. Here's how:
- Build capacity to scale up or down. To do this, you need to understand your supplier's capacity and timeline to ramp things up or down. In other words, never assume unlimited capacity. If you've got a supplier with a factory, don't assume that if you're ordering 10k units per month right now, they can scale up to 30k next month. You need to negotiate better vendor contract terms first.
- Create a feedback loop. Internally, ask yourselves: what does our data look like? How do we need to communicate with our suppliers? And how do we change things when they're not working? Questioning the plan is essential to avoiding pitfalls. Understanding that on a qualitative level with your suppliers and then building a system to shorten that feedback loop is critical.
- Be tolerant to elasticity. You want to figure out to what extent a process or a tactic is elastic. How far can you stretch it before it breaks? And as you stretch it, what are the counter or the reactive forces that it creates? Doing this will ensure your processes work even when the conditions aren't ideal.
- Track your forecast accuracy: To figure things out in the short term (for the next 30, 60, 90 days), track sales today and compare it to what the forecast was 3-6 months ago. This indicates how far off the plan was: are you under or over on the growth plan? By constantly tracking where you're at today, you can analyze where you should reconfigure your operational plans. What were your assumptions then, and how are they playing out now? This gives you the levers to model different growth scenarios.
- Consolidate your data sources. One of the biggest challenges most brands face is disparate data sources and their effect on planning. It's unfortunately common for brands to take an extremely long time–some longer than a week–to extract their data from different sources. Only after they do this can they put that data into the growth plan, tweak their model, then iterate all over again.
- Shorten the time it takes to create a plan. If brands can't manage their planning in even semi-real time, there's no way to be proactive when things go awry. If you had a tool like Cogsy to ingest all that data and have it available in real-time, you could create a growth plan much quicker. Making a new plan and updating it could be nearly instantaneous. However, most brands track daily sales, compare that to the original plan, then try extrapolating past assumptions. And while any algorithm or machine learning won't ever perfectly make these crucial decisions, it's beneficial to speed up the decision-making process and remove the guesswork. A human who knows the business can then decipher the data and make the ultimate decisions.
- Understand your numbers. The biggest lever a brand has is understanding its cash conversion cycle and how it relates to its working capital and burn rate. This is how today's biggest brands have unlocked growth - by monitoring those numbers in real-time.
These are just a few of the strategies we recommend to help manage the supply chain issue's effects on your retail brand.
Ready to beat supply chain issues in 2022?
Like I said earlier, the future of the global supply chain is uncertain. And while I can't guarantee 2022 will continue at the same pace of port congestion and disruptions, I do believe brands can prepare for the worst by following some of the strategies we outlined here.
Take a moment to revisit the links in your own supply chain and reevaluate how you can mitigate risks moving forward.
You've got this!
I hope you feel empowered to anticipate bottlenecks and build muscle around your DTC brand's supply chain management, amidst but also regardless of the pandemic.
But I know that one really long article isn't enough to fully offset the operational challenges retail brands face today. So, we've written a free comprehensive guide on how to fine-tune your retail brand's operations this year. It's called The Ultimate Guide to Optimizing Your Retail Operations in 2022.