Retailers receiving inventories any which way they can
Despite supply chain costs increasing and available capacity almost a rarity, retailers are undertaking a variety of ways to make sure they receive their inventory in time for the ever-important holiday season.
While most retailers have assured analysts that there will be enough inventory during the holiday season, some are setting expectations early. “We feel good about the composition of our inventory. It's not going to be perfect heading into the holiday season, but we feel good about it,” retailer Express CEO, Matt Moellering said during the company’s recent earnings call on Aug. 25.
“We have seen real lumpiness in the global supply chain that has led to some shortages and more so just unevenness. It's been difficult to plan inventory flow with much precision. We do not expect those conditions to change anytime soon,” Nordstrom’s president, Erik Nordstrom told analysts on Aug. 24.
Based on earnings transcripts, here’s how retailers are ensuring they get their inventories in time for the holiday season.
Most retailers have noted that they’ve ordered inventories earlier than usual. Urban Outfitters is bringing inventory in anywhere between a few weeks to up to six weeks earlier while Express placed orders in late spring for October and November deliveries.
Expanding and shifting sourcing
Earlier this year, a number of retailers told analysts that they had expanded their sourcing partners to diversify inventories and mitigate risks. Floor & Decor is one of the latest retailers to diversify its countries of origin by moving a large portion of sourcing out of China. The company estimates that China could account for less than 30% of its sales at the end of 2021, down from about 50% in 2018. Much of the shift is to the US, which, according to the CEO lowers its merchandising lead times.
Meanwhile, 75% of furniture retailer, Ethan Allen’s products are made in North America. However, it has been impacted by raw material shortages and as a result, backlogs are high. Still, despite the shortages, the company believes it is well-positioned for growth.
Ocean freight solutions
Ocean rates and capacity have been a big concern for all shippers for quite some time. Dollar General’s CEO noted that their updated freight outlook after Q1 assumed that its regular ocean carriers would fulfill only 85% of their contractual commitments. However, Dollar General is now projecting that its regular carriers will fulfill only 60% to 65% of their commitments.
Craft and hobby retailer, Joann’s CFO Matt Susz told analysts, “We typically, even through our peak time, would be contracted for well above 50% of our needs. The issue is that capacity is not there. We’re fortunate if we can be at 20% or 25% of capacity under contract.”
As a result, Joann’s ended up paying a steep price for ocean freight capacity. “Despite challenges, we have successfully obtained bookings for ocean freight and over 90% of the merchandise we will need for our peak third and fourth-quarter selling season, Joann’s CFO Matt Susz told analysts. “To accomplish this in the current environment, we are having to absorb rates for ocean freight, in some cases, up to 10 times higher than historical levels, as well as incur additional costs to move products through congested ports and temporarily shut down rail networks,” Susz said.
Some retailers such as Dollar General, Home Depot, and Walmart are using dedicated space on chartered vessels while others such as Levi’s as well as Dollar General are utilizing additional US ports.
In addition, prioritizing inventories is being done to make sure the right inventory arrives on time. “We're taking a fresh look at which skews should be prioritized for import and which should be alternatively sourced - Prioritizing containers based on seasonality, the margin impact, and our overall inventory needs. We will continue to pull forward seasonal purchases by 30 days and we're optimizing which China and U.S. ports we use to take advantage of the shipping availability, Dollar General’s CEO Mike Witynski told analysts.
Meanwhile, some retailers and brands including Nordstrom, Johnson Outdoors, Express, and Gap are switching from ocean to air to expedite shipments.
Once inventory arrives from overseas at a port or airport, deciding how to move it to the warehouse(s), store(s), or direct to consumer is the big question for shippers - Rail, trucking, intermodal, domestic air - are all options.
But, every mode of transportation is stretched in terms of capacity, and rates and spot rates have ballooned for each mode. Delays are more the norm than on-time deliveries. As such, to keep the inventory moving to its final destination(s), transloading is being used by a number of retailers such as Five Below.
Floor & Decor is opening a new transload distribution facility in Los Angeles to allow it to “maximize cargo weight which will lead to fewer containers and drive ocean freight drayage savings,” according to the retailer’s CFO, Trevor Lang.
Joann’s is spending on average $8 million on transloading because of congestion on the Chicago and Cleveland rail systems. “if you want the product, in some cases, that's what you have to do,” CEO Wade Miquelon said.
Optimizing and expanding warehousing networks has also been a strategy that many retailers have undertaken during the COVID-19 pandemic. Five Below, for example, has positioned stores closer to its warehousing facilities for quicker deliveries while American Eagle Outfitters has maintained a hub and spoke model with regional inventory positioning and regional fulfillment.
No one clear strategy
There is no one strategy that is ‘the answer’ to making sure inventories arrive at their final destination on time. Instead, a lot of creativity and a lot of money is the current strategy for many retailers.
Technology is helping by playing a role in terms of managing and obtaining transportation, managing inventories, and providing visibility across the supply chain.
More, of course, is needed as retailers continue to rethink their supply chains.
For more inventories, be sure to check out Bill Cassidy’s article, Bad assumptions, more stock-outs
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Next week I’ll be speaking on the importance of linking middle and last miles for efficient and faster last-mile service at Parcel Forum and later in the month, I’ll be speaking (virtually, but live) at LabelMaster’s Dangerous Goods Symposium on the impact of e-commerce on dangerous goods.