Supply And Demand Amplified
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A sales manager at a mid-sized distributor let out a long sigh as she ended her phone call. She had just finished a lengthy discussion with her customer service rep at a supplier company she uses regularly. It was a conversation she was having all too often with her suppliers: the company lacked inventory for the products she wanted, or they were experiencing significant delays in being able to fill her order on time. What was going on? Weren’t companies ramped up and ready to get back to business this year after a lackluster 2020?
The above scenario is fictional, but unfortunately, the problem is all too real. Distributors agree it’s frustrating and all too common, but this is a problem that is equally maddening for suppliers. How did the industry get to this point? Simply put, the shortages and delays experienced on both sides are the residual business effects of the COVID-19 pandemic.
The situation started with a shortage of factory workers in China and in factories around the world that produce raw materials, components and finished products, coupled with an increase in shipping costs for imported materials and products. The transportation issue was exacerbated due to the scarcity and cost of shipping containers, available space on ships and a shortage of dock workers to unload the ships once they got to the U.S. ports. The unavailability of raw materials along with higher prices that had to be passed on to suppliers, rising labor costs and the weakening of the U.S. dollar against the Chinese yuan, combined with an increased demand for products as businesses restarted and venues reopened, created the perfect storm. The trickle-down effect of these scenarios has rocked most industries—including the promo industry— for months.
“The pandemic disruption caused a ripple effect from materials, components and labor to production shortages that are now felt all over the globe,” says Nadira Bakar, East Coast region manager for Houston, Texas-based KTI Promo, a supplier that manufacturers and imports tech-related promo products. “This has especially impacted promo with longer production times, fragmented ocean shipment imports/exports and longer transit times over air freight. In addition, since air freight is overwhelmed, there is an added layer of delay for items to leave China.”
Dan Strickland, owner of Panama City, Florida-based supplier Garment Gear, a screenprint and direct-to-garment print company, explains the issue from a slightly different perspective. “With t-shirts, so many mills shifted production to masks and then, like so many other industries, they were forced to close or only run at partial capacity for weeks on end. Since everything has become “just-in-time” production, these ripples in the supply chain have become full-blown tsunamis of problems stacked upon each other.”
Mark Jenkins, MAS+, managing director of promotional markets at supplier Pioneer Balloon Company, says shipping delays via ocean have always been complicated and slow to respond and correct. “The epic interruption in the chain of supply (decreased demand and supply) exacerbated the inherent problems in shipping by sea. It will take time to stabilize this very slow system,” he says. But how long?
Most suppliers interviewed say it will take at least a year and likely up to three years for the system to unwind and reset. “I’d like to believe that when COVID cases decrease and the world at large is back to some sense of normalcy, these issues will resolve themselves,” says Amie Hoff, CEO of supplier FitKit Wellness in Grasonville, Maryland. “It’s hard to tell, but I hope by the end of 2022 we will see things subside.” KTI’s Bakar says because the ripple effect is bigger than anticipated and because of the global scale, the timing is hard to gauge, but her educated guess is that it will take 18-26 months to be resolved. “This guess is contingent upon vaccinations, more people entering the workforce globally and freight channels opening up,” she adds.
The labor shortage, specifically, has been a huge contributing factor to this situation. Without skilled workers, the entire system breaks down. “The decrease in labor has minimized the capability of the supply chain—it starts from manufacturing and trickles all the way down to distributors,” says Bakar. “Without workers, capacity has to be capped and decreased; the volume as we knew it ceases to exist.”
Garment Gear’s Strickland says he’s heard most wholesalers are only about 75-percent staffed as of early summer, a figure that mirrors his own facility, and with a lean team even when 100-percent staffed, his company is forced to run at a slower pace. As a result, he says apparel warehouses are only holding about a third of their normal inventory now, as well.
Tom Clouser, MAS, national account manager for Bel Promo in Medley, Florida, says rather than having a person who unpacks, a printer and a packer on each machine, suppliers are facing having only one person do all three tasks, which is causing production delays. “Not having enough people to run multiple shifts is also delaying orders,” he adds.
However, not all supplier companies are dealing with the effects of a labor shortage. Isaac Presburger, CAS, sales director at Houston, Texas-based supplier Preslow, which manufactures apparel in Mexico, says labor is not an issue and because he has a lot of fabric in inventory, his lead times are not being affected.
For another company at the beginning of the supply chain, Redwood Classics Apparel in Toronto, inventory wasn’t an issue until just recently. President Kathy Cheng says the company began to see a slow-down in inventory in August. “We bring in yarn by the container and 70 percent of raw material at the factory level is knitted within a 100-mile radius of us,” she says, adding that the company has always maintained a deep inventory of raw materials and stocks certain styles—t-shirts, for example—made up and ready to be pulled for garment dying.
The fallout from this spiraling situation has also caused price increases, particularly for raw materials. Cheng says her raw materials costs have gone up about 70 percent to date and every few weeks she gets notifications of price increases. Then there’s the cost of shipping a container of goods (which skyrocketed from $5,000 in March 2021 to $18,500 in August 2021, according to The Freightos Baltic Index), but wages are also on the rise, so suppliers are forced to increase their prices to distributors. “We use a fairly large yarn supplier—they have five plants in the U.S. and, on average, they are 100 people short on labor per plant,” says Cheng. “That’s just one component per supplier in one product category.”
“Many suppliers are already running on pretty tight margins and labor is almost always the largest component of costs,” says Strickland. “So, with domestic labor increasing to produce stateside, along with the raw cost of goods increasing, plus the tremendous shipping cost increases, how can suppliers [prices] not go up?”
“Now Hiring” signs have become a familiar site on small businesses from restaurants to retail, factories and warehouses as companies struggle to find enough workers to resume full shifts, regular hours and daily output. In August, CNBC reported more than 10 million open jobs in the U.S. and over a million more jobs than unemployed people; almost a third of small-business owners have positions that have been open for at least three months.
The short-term solution to relieve the promo industry’s woes is to get people back to work—which is easier said than done. Government paycheck assistance combined with COVID-19 infection concerns and changing quality of life priorities have made many people rethink the jobs they held prior to the pandemic. In addition, 2.5 million people retired during the pandemic compared to just about half that number in 2019. In China, factories are having difficulty filling jobs because migrant workers are staying home amid COVID-19 fears, and many young workers are rejecting factory jobs in favor of higher pay in the service industry, The Wall Street Journal reported in August. In general, these trends are indicative of a shrinking labor pool, and the trickle-down effect means fewer people to get products on warehouse shelves.
Suppliers are also warehousing stock in larger quantities as much as possible to accommodate the demand and learning to plan ahead. “Stock up on inventory to hold you over for a couple of months and give yourself plenty of time,” advises Jason Scaduto, executive vice president of Paterson, New Jersey-based LBU, Inc., a manufacturer of custom cut-and-sew products.
Many industry practitioners see the current situation changing the industry in numerous and significant ways, particularly extending lead times industry-wide and requiring suppliers to stock more inventory and opening up opportunities for decorating facilities domestically. “I anticipate an increase in domestic decorators or increased traffic with existing decorators,” says KTI’s Bakar. The company has stocked items domestically, such as USBs, power banks and Bluetooth® ear buds at its Houston warehouse since the Dangerous Goods Act was implemented a few years ago. Recently though, the company has begun stocking popular products at its overseas facilities so that orders can be decorated there and shipped to Houston. “This removes the additional time of gathering material, assembly and quality control,” Bakar says. “So far, this has been successful for mid-level orders and quantities.”
Diversification of sources is another potential outcome of this crisis. “Distributors will have to look for alternative sourcing and not just rely on goods imported from Asia. Local and nearshore manufacturing will be looked at more closely,” says Preslow’s Presburger. Bakar says this ripple effect will force suppliers to pare down their selection of products, change their logistics to what they can warehouse locally and will likely mean growth for domestic decorators.
Garment Gear’s Strickland believes companies will seek out ways to become more efficient when it becomes absolutely prudent for them to do so. He says, “It does take some time for companies to navigate through these new waters, but the good ones will come out better—both for the company and their clients.”
Like in many other industries, the long-term effect of the supply chain issue will mean higher prices, and suppliers predict marketers will be forced to increase their promo budgets or reduce the number of items they purchase. It’s also an opportunity for distributors to be creative and resourceful. “The promotional products industry is not immune to the same inventory and pricing issues they are experiencing in their everyday lives as consumers at the retail level,” says Pioneer Balloon’s Jenkins. “The good news, of course, is that distributor buyers are closer to the situation and origins of supply. They can help find and manage solutions for their customers and business and prove their immense value to their clients.”
And there’s more good news. On August 27, the White House announced it would appoint John Porcari as port envoy to the Supply Chain Disruptions Task Force, which was created in June. He will be working with the Department of Transportation and the National Economic Council to address congestion at U.S. ports, a problem the White House admits has existed for years.
Honesty, transparency and timely communications are key strategies successful suppliers are using to manage distributors’ expectations and avoid frustration and disappointment. “I can only manufacture what we have on hand. We let our customers know—we are very transparent,” says Cheng at Redwood Classics. “We are also being proactive in providing solutions and recommendations. For example, ‘If you’d like solution A, your delivery might be longer, if you want solution B, your delivery might be shorter, but the cost may be higher.’”
At KTI, salespeople are staying in constant touch with clients on delays, but also promoting items that are in stock for quicker delivery in their Houston warehouse, to give them options.
LBU’s Scaduto says his team is letting customers know upfront that they are dealing with delays and increased costs, so there are no surprises. “Our domestic production is filling up quickly and production times keep getting pushed out, so we are advising them to plan ahead and place orders early with plenty of time for delivery,” he says.
If there’s one message distributors should take away, it’s “order early”—especially for holiday and year-end gift-giving. “We are trying to manage expectations as best we can,” says Hoff of FitKit Wellness. “The last thing we want to do is promise something we know we cannot meet. We are all about transparency and would rather not take an order than not meet an in-hands date. We check with each team from start to finish in our production process to ensure we meet the needs of our clients before committing to anything.”
Hear more about what suppliers are saying on this issue in the latest episode of PPAI PromoTalks. In this podcast, PPB presents The Supply Chain Crisis featuring Howard Cubberly, general manager of Goldstar Global, and David Berger, a partner with Global Promo.
During the 32-minute conversation, Cubberly and Berger share their insights and guidance on the issue. This podcast is free and sponsored by Kaeser & Blair. Find it and the full library of podcasts at pubs.ppai.org and click on PromoTalks; also available on Spotify and Apple Podcasts.
Tina Berres Filipski is editor of PPB.