The Great (Long) Reset: Watching the Supply Chain in Consumer Goods
Hardly a day goes by without someone asking me when “it” is going to end. “It” is the post-COVID supply chain reset. It is a tough solve, because for most industries both supply and demand have been disrupted. And unfortunately, the answer to the question can’t be distilled into simple sound bites because there are so many factors involved.
[See also: P&G’s Global Scale Helping Mitigate Supply Chain Woes]
A significant dip in COVID will help reset economic activity. First, it will help shift consumer spending back into the service sector – helping to cool down some of the consumerism creating the heightened demand we are observing. Second, some analysts attribute current demand spikes to the infusion of government stimulus funds triggered by COVID. As these benefit streams end, economic activity should settle back to some level of normalcy, plus or minus the impact of any lingering structural alterations the virus may leave in its wake, such as the expansion in e-commerce or the rise of the work-from-home phenomenon.
Of course, this does not mean that everything will be the same as it was before. We have learned how to shop differently, from getting home takeout delivery even in far-flung suburban areas to having every type of consumer product — from lawn fertilizer to drywall screws — delivered to our homes. As both a supply chain professional and a reasonable exemplar of the American consumer, I consider the long-range supply chain implications of everything relating to my own personal consumption patterns. To me, the concept of post-pandemic normalcy is not some pre-COVID status quo but rather a return to supply and demand balance across the global supply chain considering our new constructs.
Here are the indicators to watch, which fall into three categories:
1. North American Supply Chain and Marketplace Metrics
The supply chain Indicators that ring true to me are a bit wide-ranging but generally speak to operating constraints in the marketplace, currently marked by too little of the right inventory, too many transportation constraints, and the pervasiveness of e-commerce as a significant driver of retail volume.
Retail Inventory to Sales: This ratio of inventory on hand to sales is published by the Fed and is normally in the 1.4-1.5 range. Since the onset of COVID, however, it has dropped to 1.1. Essentially, demand is up, and retailers have not been able to keep up nor stock up. As this level moves back into the 1.4 range it will mean we are approaching an equilibrium of demand to inventory at the retail level.
Container Pricing: Shipping containers are a finite resource, making this metric another key supply and demand indicator. The scarcity of containers is driving up pricing; right now, the cost to rent a shipping container moving from east to west has reached astronomical heights — about ten times normal. When this trend peaks, then eventually declines, it will indicate that the flow of goods is less hindered by this constraint, making it a leading indicator of a potential reset.
Port Backlogs: As the flow of goods from east to west normalizes, the backlog of container ships at anchor in the world’s ports will decline, reducing lead time for delivery and freeing up all the inventory currently “on the water.” It is estimated that nearly 20% of vessel capacity is currently tied up in port delays, making port backlogs a major constraint in the flow of goods. If resolved today, this backlog would unleash a surge of 30 to 45 days’ worth of inventory into the North American supply chain and release vessel and container capacity back into the global supply chain.
E-Commerce as A Percentage of Retail Sales: When COVID first hit the U.S., consumers quickly shifted to e-commerce for their everyday needs, doubling the existing growth rate of this retail channel. This statistical leap skyward led e-tailers to place anomalously large orders — to load up on inventory. In hindsight, few economic factors proved more disruptive in the initial, early-stage response to COVID. During the intervening months, the national metric of e-commerce sales seems to have roughly reset to the same growth plane it was exhibiting pre-COVID. This is an important trend to eyeball with regularity.
2. Economic Indicators
These metrics include the usual suspects like unemployment and GDP. But even more telling are the editorial observations relating to these factors.
GDP: After falling more than 30% at the outset of COVID, GDP has recovered significantly since the initial shock, with the past two fiscal quarters posting growth over 6%.
Unemployment: Most obviously, as employment levels improve, there will likely be an easing of labor constraints throughout the supply chain that should improve the flow of goods.
Separately, this presents the perfect use case for using big data resources and predictive analytics tools to investigate econometric influences on your consumers. As an example, if pilots and Wall Street guys are the target consumer for your new-fangled watch, it would be interesting to look at the correlations of employment to your consumer cohort.
[See also: Will Work From Anywhere Work for Consumer Goods?]
3. Industry/Company/Consumer Indicators
Regardless of industry, you will find a lot of meaningful indicators within your own business. While the following metrics may be slightly skewed toward consumer businesses, the reality is that most organizations have customers and consumers who have ordered in advance of need to stock up where they can, some more effectively than others. Understanding either your customer or consumer behaviors is critical to projecting your future.
Trade Inventory: The amount of “trade” inventory carried by your customers has likely fluctuated wildly over the past 18 months. Some of your customers have stocked up while others have not been able to accumulate enough stock to satisfy all their needs. Understanding how much trade inventory is currently being held by your customers is a helpful statistic in determining not only your organization’s future sales, but the overall state of the marketplace.
Forecast Accuracy at the Mix Level: Many S&OP and consensus processes report forecast accuracy results at an aggregate level, focusing on a product group or family. Most do not report accuracy at the mix level: by specific pack size, or flavor, or color for example. COVID altered many consumer behaviors — such as buying in bulk packages or e-commerce variations — and many CGs have been struggling to manage the implications at the mix level, which is the level of detail needed by supply planning.
Reporting forecast accuracy at the mix level is important because as forecasting improves, so should inventory balances throughout your organization. This will create a level of control and balance in the organization’s demand and supply plans. It is another read of normalcy in your supply chain.
Consumer Inventory Bleed Down: If you are in a consumer goods business it is important to understand whether your consumers might have hoarded product or have changed their frequency of use. Short of polling your end consumer base, there is no exact way to estimate consumer load-in. However, for many products, consumers did load up during the initial months of COVID. Any consumer insights you can glean — such as point of sale “ring size,” during COVID and since — will help you estimate a return to normalcy in your demand patterns. Most POS data syndicators can provide you with this information, and the extra analysis will be helpful in determining whether your consumers are still “pantry loaded”
Resumption of Consumption: Throughout the early stages of the pandemic, many long-standing consumer habits suddenly changed. At some point, however, as more and more of us return to traditional workplaces, the consumption of products like hair color will resume. These products might not achieve their prior levels of consumer consumption, but a restored, consistent level — a new normal — will become obvious.
Parting Thoughts
As I look at the evolving metrics cited throughout this article and confer with many of my peers, I still see an extraordinarily constrained supply chain that remains under-inventoried and bedeviled by uncertain mix issues at this time. I also see a roaring economy that will push consumer demand further upward along with significant unresolved backlogs at important pinch points in the supply chain. Some have described this as a supply chain perfect storm. It is hard to argue with that assessment.
What is important in the interim, however, is to test your own metrics, poll your own customers, and dig up data on your own consumer cohorts to help define what normal means for your business, and when you might expect it to return.
Patrick Bower is senior director of supply chain for Aceto. Aceto is a leading global chemical distributor and virtual manufacturer providing specialty chemicals, intermediates, and reagents to the life science and consumer goods end markets.