After the famine, the flood. The past two years have been blighted by supply shortages—with just-in-time retailers struggling to ship their goods, electronics manufacturers staring down a shortage of computer chips, and supermarkets struggling to fill their shelves. Now, some retailers are struggling with the opposite problem: a deluge of stuff nobody wants to buy.
Some of the biggest retailers in the United States have nearly $45 billion in excess stock, according to Bloomberg, up 26 percent from a year earlier. That’s a result of retailers scrambling to avoid the shortages that marked the start of the pandemic and then failing to anticipate a slowdown in spending on consumer goods as the world opened up. Now, in an attempt to shift volumes and cut losses, companies like Target, Gap, and Walmart are relying on deep price cuts.
Many retailers are dealing with the issue Amazon faced in its recent first-quarter results: Caught flat-footed when Covid hit, they planned for increased demand that just hasn’t materialized. For Amazon, that has meant a surfeit of empty warehouse space. For others, it’s the opposite problem: too much stuff, and not enough space to store or sell it.
Costco has a backlog of Christmas-themed items that didn’t arrive in time for the last festive period and plans to put it on shelves this year, but prices on other items, including the big-screen TVs popular during lockdown, are likely to tumble. Meanwhile, those pajamas that countlesscolumninchesweredevotedto in the early stages of the pandemic are now likely to be deeply discounted, alongside other leisurewear in vogue during lockdown.
“It really starts with the pandemic,” says Lisa Ellram, a distinguished professor of supply chain management at Miami University, Ohio. “Retailers did not know what to do.” Between February and March 2020, retail sales tanked 9 percent in the US, dropping another 15 percent a month later. But by June 2020, retail trade had returned to pre-pandemic levels, and it has continued to rise ever since. “Things really picked up—and they couldn’t meet demand, because people had stopped buying things, then all of a sudden people wanted things,” says Ellram. “There were all these strange and unexpected shifts in demand that caught a lot of businesses off guard.”
Those demand shifts coincided with some of the worst supply chain disruptions in recent history. “People had spending power and couldn’t buy a lot of the services they normally consume, so they bought goods,” says Marc Levinson, author of two books on shipping containers. Levinson was one of them: He bought a sofa—then waited nine months for it to be delivered as Covid outbreaks closed Chinese ports and the Suez Canal, through which 12 percent of global trade passes, was blocked by a very big boat.
With delays and disruption the norm, companies strove to avoid future shortages by overbuying and holding stock locally rather than relying on the increasingly broken just-in-time supply chain. Others have spent big to remake the supply chain entirely. Intel, for example, has said it will build a $20 billion chip-manufacturing site in Ohio to ease shortages due to the supply chain.
Issues across the supply chain have been exacerbated by what Ellram calls phantom demand: When faced with long lead times for basic items, people will often over-order. Someone might put deposits down on sofas with three retailers and see which one arrives first, then cancel the other two orders. “Manufacturers were getting fake signals of what the true demand was,” she says.
There was also the idea that the pandemic was reaching its end phase. “Retailers hoping to rebound went out and ordered plenty of stock,” says Enda Breslin of ShipBob, a global fulfillment firm.
But there was a more significant problem: The world was changing. Pandemic restrictions eased—and retailers forgot that spending on goods was only one part of the equation, all of which causes a headache for businesses that have spent the last year trying to prepare for demand patterns similar to the summer of 2020 and avoid the catastrophes of the summer of 2021—while realizing that the summer of 2022 is entirely different from both. “That’s what retailers and manufacturers are trying to cope with,” says Levinson: “A lot of them stocked up because they didn’t want to disappoint their customers with empty shelves.” Now they have too much stuff.
The speedy way to untangle the mess would be to break the cycle of feast and famine—but that’s easier said than done. The economy is a mess, consumer spending is unpredictable, and the war in Ukraine continues to roil. “We just can’t absorb this much instability,” says Ellram. She says that the pendulum will remain out of kilter, but the over- or under-ordering will gradually slow as companies temper their overreactions to real-world economic and societal changes. However, the tanking global economy is still a big unknown.
This means that the issues of the past two years are likely to echo for a little while longer, albeit at a lower level than before. Breslin says that if the closure of the Suez Canal and chip shortages were one perfect storm, the situation the world now faces is an entirely different storm. “Fuel prices have gone up,” he says. “The inflation rate has gone up. People just don’t have as much discretionary spending, which means retailers have to start discounting.” Companies with rapidly aging summer stock face a conundrum: spend money in a tight warehouse market to store it for next year or take a hit on profits and sell at miniscule or non-existent margins. Another, equally unpalatable alternative is to unload stock on secondary markets, where big discounters like TJ Maxx will snap it up and sell it on the cheap.
The problem is particularly acute for bigger companies because of the way they buy. Smaller retailers order less stock more often on shorter lead times. But the sheer number of items larger retailers sell means their orders with manufacturers are made further in advance, forcing them to predict demand based on less reliable information.
Faced with an abundance of stock in warehouses, retailers are likely to cut back orders—perhaps too much, resulting in undersupply, and then counteract that by over-ordering, repeating the cycle with smaller margins of error. “For the big guys, the definition of insanity is just keeping doing the same thing, expecting different results,” says Breslin. “They’re doomed to keep doing that.”
Credit belongs to : www.wired.com