An external decision can affect your supply chains

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply Networks

International trade not moving

Decisions about imports and inventory.

Holding inventory is one approach to reducing the sales risk of not satisfying customer demands. In most situations, inventory management (policy, planning and control) is based on internal organisation guidelines, but what about an external decision that could influence your inventory decisions?

The blog Supply Chains can change but not for your reasons illustrates that supply chain professionals must be aware of external events which may challenge the equilibrium in their supply chains. Extending that discussion is the upcoming 25 percent import duty by the US on a range of products from China, commencing January 1, 2019. For an importer, the most likely reaction is to import more items before the new tariff is imposed; but are there consequences?

An element of inventory management is fluctuation inventory. This inventory is held in excess of the cycle inventory to overcome Uncertainty associated with unplanned events and is called either safety stock, reserve stock or buffer stock. But the unplanned events, typically influenced by variances in demand, supply and lead times are those within an individual organisation’s supply chains.

In the case of a government imposed regulation that affects an economy and many supply chains, any inventory added in response to the imposition will be in a separate category – call it event response inventory. But, this additional inventory magnifies three influences on inventory levels in the US:

  1. end of year promotional selling and festive season
  2. continuing growth of the eCommerce channel and
  3. the shutdown of Chinese industry for their New Year holiday period

1 Festive season: Each year, consumer focused supply chains in the US increase their inventory levels to cover higher demand for the period between late November and late December. But in 2018, an additional amount of inventory is to be imported before the end of the year. This has affected the capacity of supplying factories, international shipping and domestic road and rail transport. For products with a high value to weight ratio, some importers are willing to use airfreight; so tightening the capacity for cargo planes and at air freight terminals.

Imports through the west coast ports of America have increased over previous years, affecting freight rates and handling charges. Spot freight rates for a 40-foot container in mid-September from Shanghai to Los Angeles were more than 30 percent higher than from Shanghai to Rotterdam, which is about 12 percent longer in distance. Similarly, rates for other transport modes, handling and warehouse space have increased.

2. eCommerce: It is not yet understood how the capacity of ‘less than truckload’ (LTL) transport and warehouses is influenced the growth of eCommerce or tariff increases. In the second half of 2018, eCommerce has about 17 percent of US retail sales and some commentators expect it to be about 35 percent by 2020. This does not imply an increase in total retail sales, just a change in the channels of final distribution. However, it does change the demand for types of warehousing space, full container loads and LTL transport.

The increased activity (influenced by the impending tariff increase) has grown employment prospects (and wages) in ports, road transport, railways and warehouses. Based on a few projections, more than 450,000 transport and warehousing jobs are expected to be filled over the coming 18 months. However, projections can be based on current demands and not on potential changes to the employment situation.

Challenges for Logistics in the US

Investing in event response inventory does not change the situation that prices will increase. Instead, it buys time at old prices for importing organisations to negotiate with suppliers and customers about re-balancing the equilibrium of ‘who gets what’ through a supply chain. While negotiations about pricing largely depend on where the power resides in a supply chain, changing supply chains within and between countries can take months or years, depending on logistics infrastructure and the skill base of people.

While inventories have remained in the 13.5 to 14.5 percent of GDP range; since 2009 the value of inventories has increased by about 30 percent, according to the U.S. Bureau of Economic Analysis. This has required additional warehousing space, transport capacity and people; yet how much excess capacity will remain after the ‘spike’ of inventories has passed through the channels?

Price increases and the reaction of consumers will commence later in Q1 2019, so inventory will cost money to sit in warehouses. Learn About Logistics recommends to calculate the cost of holding inventory (the carrying cost) as a percentage of the cost of goods sold (COGS), at 2 percent per month. This figure is influenced by obsolescence risk and the increasing cost of credit in the US.

Whether consumers will absorb a higher price for a product will depend on its ‘price elasticity’. Goods that are needed or those that are differentiated in the market could maintain their demand, but for others, demand could be substantially reduced. The consequence will be excess supply in warehouses, retail clearance sales and reduced profitability.

The lead time for products to be ordered, made and shipped from China means that 2019 orders for the affected products have already been ‘put on ice’. The recent orders have ‘brought forward’ expected sales, so additional product is not required. As retail shelves are replenished after the 2018 holiday season, the ‘spike’ in transport movements will reduce to more normal flows, so this may affect employment in logistics services.

3. China: With no or few new orders, the Lunar New Year is an opportunity for re-calibrating demand and supply. A seven day public holiday in China over early February is an opportunity to not build inventory – close factories, container parks and ports. However, this could cause shipping companies to cancel programmed voyages, due to low bookings for containers. Fewer ship voyages could affect work loads and employment at US west coast ports.

Visibility in supply chains

So, here is a real situation of a government decision affecting multiple supply chains. The result is orders brought forward, which provides increased employment opportunities, but tightens capacity and increases costs. This to be followed by a ‘drought’ of orders, with reduced need for transport and warehouse services and labour. It could be an expensive exercise for the economy and some enterprises.

Although much publicity has been given to new technologies that assist supply chain visibility, few shippers and logistics service providers (LSP) have yet to implement working networks, systems and applications. This could be, as discussed in the previous blog, because it is not in the commercial interests of software suppliers to engage in the development of standards for interoperability.

Although this blog has discussed the potential situation in America, similar events can take place in any country. As we are aware, supply chains are subject to change by suppliers, service suppliers, customers and natural emergencies at any time and are also dependent upon external influences. For each organisation, their supply network is a complex adaptive system. The key word is that your supply chains and your organisation, need to be ‘adaptable’.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...