Unrelenting demand from cash-flush shoppers for certain goods, restocking by companies scrambling to satisfy them as regions emerge from lockdowns, and ever-changing COVID-19 protocols have created an unprecedented slowdown of goods that is testing the global economy and its distribution networks. Manufacturers, wholesalers and other companies are scrambling to secure container space on ships at exponential prices to get their goods to Canada. They’re also dealing with rising costs for raw materials and agonizing over whether they have the power to pass on all these added expenses to customers, or whether it’s better to take less profit and absorb the hit themselves.
“This is 100% the worst thing we’ve ever seen,” says Lan Nguyen, Herschel’s senior vice-president of operations and information technology. “This is a global crisis in terms of logistics. And what’s inside a shipping container is kind of irrelevant. We’re all fighting for the same space.”
Fifteen months into the COVID-19 crisis, supply-chain shock has emerged as a top-of mind worry for Canadian corporate leaders, forcing a deep rethink of how to source the materials and goods they need and how much profit they’re willing to sacrifice in the face of rising expenses. Some say it will take months or even years for the capacity constraints and backlogs to ease, a situation that could permanently influence what Canadians can buy and at what price. Roughly 80% of the world’s goods travel by ship.
Herschel executives began seeing transportation problems in January, and the situation has only worsened since then, Mr. Nguyen said in an interview with The Globe and Mail. The company is now experiencing shipping delays of three to four weeks (and he notes that “a one-month delay is a big deal” for a four-season business), and it has paid up to 40% more for transport so far in 2021. It normally fills up as much of a container as it can to keep costs in check but is now having to buy capacity whenever it’s available in order to keep goods moving.
Home accessories design and manufacturing company, Umbra is facing similar problems. Prices of the steel, wood and polypropylene Umbra uses to make its wares have increased substantially even as the supply continues, co-founder Les Mandelbaum says. “We can get [material]. The problem is we can’t make any money because we can’t raise prices quickly enough… We have record sales but the lowest profits I’ve ever seen. And it’s depressing because we’re working harder than ever.”
Even the best foresight doesn’t always lead to perfect outcomes. Mr. Mandelbaum anticipated the freight disruptions and loaded up on inventory earlier this year in order to have what he needed. But 50 container loads arrived at once, and Umbra’s two warehouses, in Buffalo, N.Y., and Toronto, couldn’t handle it all. He ended up renting outside storage that has cost Umbra half a million dollars so far this year.
Umbra counts about 1,000 items in its catalogue. It’s now doing a triage of which ones to keep in this high-cost environment and might drop products that can’t sustain significant price increases, he says. It’s a complicated calculation that takes into account the need to maintain market share while tallying a profit. The company is also exploring manufacturing in Mexico as a solution.
At South Shore Furniture, a family-owned furnishings manufacturer headquartered in Sainte-Croix, Que., president Jean Laflamme says his three factories were on the verge of shutting down recently because the company had trouble getting specialized pieces it typically sources from China. He is now ordering enough stock to last six months instead of the usual three and has also had to import things by plane.
The appetite for South Shore’s furniture and decor has rarely been stronger, but the company can’t meet the demand, he adds. His team has been forced to slow down production at times in recent weeks to make sure they have enough parts and materials, and they’ve now decided to refocus on a smaller number of products they can crank out with consistency.
The paradox is stark: At a time when many companies are generating some of their highest-ever sales, the money isn’t flowing to the bottom line. At Umbra, sales surged 40% last year to roughly $200-million, and they’re up 82% so far this year through May, according to Mr. Mandelbaum. Profit, however, is down 34% as costs eat away at earnings.
“Our ability to withstand a less profitable year – although I haven’t quite accepted that yet – is part of being in business,” Mr. Mandelbaum says, adding this kind of disruption cannot continue indefinitely. “And I wouldn’t make short-term decisions that affect the long-term, like losing talented people or giving up on great products because of a short-term disruption… The point is that you hope for a better day.”
Source: Globe and Mail