GLOBALIZATION NEEDS REINVIGORATION PART 3 – 2022 JANUARY

Looking back at the holiday season of 2020 where the consumers were not confident to shop, and the arrival of the spring 2021 collection arrived at the stores in the midst of the coronavirus, the goods started to pile up. The retailers used the holiday season of 2021 to unload their inventory to the consumers and we have heard the complain of the lack of freshness during the time.

But during 2020 we saw the weaknesses in the supply chain and many of those challenges were never seen before. Starting with the raw material cost which has been increased, then the shipping cost with the container ship, Ever Given, strained in the Suez Canal, caused the contain ship-jam triggered the rising of the cost. The congestions at the different seaports, caused further delay and jacked up shipping cost. Lately, with the covid cases at the major seaports in China, pushed back the shipments. I have been using an expression that, it doesn’t rain but it pours, to describe the situation.

It is easy to say that the supply chain has not been optimized as over the last twenty years the industry has been pushed by the growing demand, and as the result everyone was doing the catching up. Who would have thought for a situation that we are facing today, not to mention that actually we have a multiple situations to deal with. In business school we talked about risk management based on different scenarios, but our supply chain was built so effectively and who would have thought that it would fail one day? 

In general the product sourcing was led by the low-cost, price-driven perspective and companies were looking for the cheapest price. The market was full of deals for the last ten years. The low cost drove up the high volume and it was a vicious circle that has been haunting us for the past two years.

What was emphasized as “on-time” delivery is no longer a reality now, although the specialists said that it still accounted for 38% of the business. I would be very shrewd to say that it simply doesn’t exist. One thing I know that the freight cost has escalated to six, seven times, and the worst I have heard is ten times.

And due to the sourcing of goods, the buyers have moved from China to other lower-cost countries in Asia. Whether you like China or not, you need to understand that the country, over the last forty years, has developed the most complete, and you can even say that the most advanced supply chain for the textile materials. The other Asian countries can only provide the stitching at the lower cost-per-minute. They have no infrastructure and they are lack of business strategy. For these Asian countries they have no means for any major investment and lack of the foresight for technology that can carry them in the years ahead. If those fabrics and components are stopped from shipping from China, they have to depend on their own textile industry that are either in those very early days—old, fragile and ineffective, or at their infant stage. Their entire production will grind to a halt. 

Today’s China is not going to sit and watch the developed world to move away their business, in this case, their cheese, but to open sewing plants in Bangladesh, Cambodia, Vietnam, to take advantage of the lower minimum wages. They can play around with their costing structure and between China and the developing countries to strike a balance and will still remain in business for the many years to come.

And besides, not to forget that it has a very large domestic market where they can serve with their products as well. In many ways, China is still the winner and the buying offices know about all the options and they are playing along to the song book to remain in business.

Not to say that the developed countries are without challenge during the pandemic. After the shipments are unloaded at the ports, they will need to be distributed fast enough to the retailers, and guess what? We are in the trucking crisis!

It has now come to our knowledge that the trucking industry has been severely lacked of the truck drivers, but it has also reached the breaking point because of the pandemic. Earlier on, we noticed that many of the drivers were contaminated by the covid that put a lot of them out of service.

In 2019’s report from the American Trucking Associations, the industry was short of 61,000 drivers in 2018 already. We can see that it was an old problem. In 2020, some two million workers were hired as long-haul truck drivers according to the Bureau of Labor Statistics. This high number of hiring is showing the jobless situation in the US is severe and it has moved people to be trained as truck drivers. Having said that, it is predicted that there will still be openings for some 231,100 new truck drivers each year for the foreseeable future.

Our problem with the retailers do not stop with the global supply chain, but the calling for the retailers to transit their operations from a primary physical retailer—bricks and mortar, to a digital e-commerce model. Although the writing was on the wall and yet it took them a long time to migrate. Now with the covid, what would take previously five years to make the change, can happen now in one year. This is the time if you don’t change, you won’t be able to survive.

To run the retail store business side by side with the online business where some thorough procedures would need to map out. We need to know that these are fundamentally different operating models. The demand for both businesses are still in their infant stage, especially during this time of the covid. Considerations of supply and demand, and pricing structures are very different. To have a profitable business will need a lot of tweaking before you can say that it is successful.

Consumers are also looking at the two business formats differently. Their shopping behavior will have to reestablish as probably many of them would have changed their lifestyle already after spending nearly two years under the pandemic.

Already that the retail business is depending heavily on the fourth quarter of the year, in fact more than 60% of their business are made in this quarter, and also in the holiday season they can sell higher ticket products. I don’t know if many of them would have found it difficult for them to last until next year if they continue to miss the numbers for this yearend.

Lately, there have been a lot of talks about paying attention to their business for lowering the carbon emissions, use the recycle materials and go for their practices in sustainability. Paying attention to the supply chain will drive a lot of them out of business as it is a goal that no one can achieve under this adverse situation.