In a typical year, US retailers would scramble to ensure merchandise is available for Black Friday, Cyber Monday and other sales events before the holiday season. But 2022 is not a typical year.
The global pandemic created a series of bullwhip effects that culminated in the situation we are in today. Imports are being delayed or canceled, in part due to a lack of storage capacity across the country. For example, warehouse areas outside of Los Angeles — home to the complex, where about 40% of goods enter the United States — are operating at almost 98% capacity. There is simply no space to store more goods.
But lack of space might not even be the biggest problem right now. The economic climate is stormy, with fears of recession, concerns about inflation and enormous consumer uncertainty. In addition, there is ambiguity regarding employment contracts in ports and railroads in the United States and abroad. And all against the background of escalating geopolitical tensions and war.
Retailers are likely wanting typical peak season issues given the overall environment. However, it is time for leaders in retail supply chains to adapt and start planning to ensure a prosperous 2023 as a new wave of disruption looms.
Doubling at S&OP
We’ve all heard the word ‘unprecedented’ far too often over the past two years, but the term aptly describes the impact of a pandemic at a time of large-scale global trade. Today, supply chain executives are faced with inventory challenges and trying to correct what is still “sellable” and what should be written off entirely.
It’s easy to take Target’s situation — the company said it plans to sell many SKUs at (at best) low margin — as a cautionary tale that highlights the flaws in the sales and operations planning (S&OP) process. But this approach is short-sighted. There are well-established precedents for how consumers behave when interest rates are high, how shoppers tend to reallocate spending in the face of inflation, and what it looks like to enter and emerge from a global recession.
In other words, S&OP leaders can rely on historical data to plan for their next year or two. Even if new inputs are required, today’s most advanced operators should be able to train and tweak analytical models to adapt to consumer behavior.
Expansion of the S&OP participant list
The S&OP practice has transformed retail as a whole, but it has also shut out those tasked with implementing the plans. For example, transport and camp managers were generally offered a seat at the table during the autopsy to identify and discuss opportunities for improvement, rather than help create the plan.
In 2023, it will be crucial to involve these executives in the planning phase as both warehousing and transportation face tremendous challenges.
We are witnessing the start of a capacity shakeout in the trucking space, with hauliers of all sizes poised to close down. There are several reasons for the cleanup. First, demand for truck capacity has exploded in recent months while fuel costs — typically the second largest expense for a trucking company — have skyrocketed. In many cases, hauliers have difficulty finding profitable loads, and large hauliers even accept unprofitable loads to maintain their driver pool.
Trucking is very cyclical, and most major fleets have established this playbook. They understand that by tapping into financial reserves, they are well-positioned to grow when small, resource-constrained fleets and independent airlines inevitably close their operations.
The trucking community is also facing a monsoon of regulations that will dramatically transform the industry. In California, Assembly Bill 5 (AB5) threatens to make it more difficult for small trucking companies to operate some traditional models. Many small and independent operators secure their Motor Carrier Authority and insurance as a first step in maintaining their business.
However, adding costs to already constrained margins is untenable for carriers. Additionally, AB5 is being used as a blueprint for the national PRO law, which would have similar implications for trucking companies across the country.
Worker classification is just one of many regulatory concerns related to transportation capacity. California Air Resources Board (CARB) regulations, scheduled to take effect on January 1, 2023, will eliminate more than 20% of the trucks currently authorized to pull cargo out of ports. Clean air and fewer emissions are of course welcome results. But truckers are already facing tight margins and may be forced to shut down operations rather than buy new vehicles. Additionally, many other states, including New York, New Jersey, Massachusetts, Washington, and Oregon, follow clean air regulations.
Those challenges will be compounded by potential railworker strikes, ongoing concerns of a walkout at West Coast ports as the Pacific Maritime Association and dockers’ unions negotiate, a massive talent gap in warehouses and the looming risk of a new COVID variant derailing could, the supply chain is tightened again.
In other words, the plans from an S&OP huddle are delegated to a team that faces more uncertainty than ever. Using their experience navigating uncharted waters will mean the difference between creating a great plan and experiencing great execution.
model for exceptions
The next year brings with it tremendous uncertainty related to various economic, geopolitical and labor factors.
A renewed commitment to the S&OP approach, coupled with new inputs from the executives tasked with executing the plans, will position retailers to thrive. But retailers need to add the unexpected to their models or fall victim to the same problems that caught them off guard this year. This includes examining new scenarios – for example what a strike by rail workers could mean for a company’s supply chain and costs – or identifying other countries where they can find an additional source of basic solutions to warehouse best practices.
Creating redundancies is a challenge, especially when ordering goods that may be six to 12 months in advance of purchase. However, backup plans and business continuity planning must now be integrated into S&OP practices, taking into account multivariate pricing and pre-agreement lead times.
While it’s suboptimal to miss a typical peak season, the lull from the usual madness could allow retailers to recalibrate their S&OP approaches to ensure a prosperous 2023 and beyond.
Mike Bush is Head of Communications and Brand at CONTINUE Truck transport.
