A recent article by The Hill asked, “Will broken supply chains stop Santa Claus?” highlighting that a mostly invisible part of how goods arrive on store shelves is now front and center. The pain is real and likely to last, according to Gary Maxwell, a supply chain expert who most recently served as chief supply chain officer at Dollar Tree.

“Frustration is running high among all parties, whether it’s retailers, manufacturers, or folks in the transportation business,” he said during a GLG teleconference. “Because customer expectations are high, demand has surged but capacity is limited. At the moment, it’s difficult to find quick solutions to the problems that the supply chain’s experiencing.”

GLG’s EY Shin spoke with Maxwell to learn more about the issues in the supply chain. The following is an excerpt from the broader conversation.

Container rates are soaring, with backlogs at the Los Angeles Port and others. What are the key drivers of the current issues facing ocean freight?

The supply chains of the past had to deal with weather events, labor strikes, and raw material shortages. But I’ve never seen all those links in the supply chain impacted like they’ve been with the pandemic. Factories have been closed for a week to two weeks because of COVID. Key ports like Shatian and Ningbo in China closed. Those closures become cumulative. It’s difficult to catch up at peak times. Along with those challenges, carriers are trying to manage lead times to what their originally quoted expectations were. Then those goods pile up at the ports and warehouse capacity is strained. Retailers and manufacturers have to be creative and innovative with short-term solutions to just deal with the coming business for this holiday season.

What’s happening with domestic transportation and what’s causing the challenges?

Look at the example of toilet paper at the start of the pandemic. We’re not using more toilet paper, but demand shifted from office complexes to residential. The demand shift in locations has challenged factory capacities and domestic transportation. Supply chain capacity particularly around truck drivers has been a real issue. The American Trucking Association continues to project that we need an additional 80,000 truck drivers today. So increased demand and a shortage of drivers has translated into increases of 50% to 60% on cost per mile in key markets. That’s a significant cost and throughput challenge for retailers and manufacturers.

Carriers are reporting great profit. Operationally, they’re sound on their financial metrics, but meeting capacity requests has been a challenge. They need more drivers behind the wheel. Drivers that used to make $45,000 annually two to three years ago can now earn $60,000 to $75,000. Wages are one of the biggest component costs in transportation, leading to retailers experiencing large increases.

How much does the labor shortage account for the challenges in the supply chain?

It’s been big. Along with drivers, there are also issues with warehouse workers, partly due to COVID and the fear of it. People just aren’t returning to work. They’re making different decisions. There’s a struggle to fill all the positions for peak holiday volume and costs have gone up. Hourly workers are being offered $1,000 as a signing bonus. First-line supervisors and managers in competitive markets are being offered signing bonuses of $5,000 to $7,000. Labor is a big piece of the cost for retailers and even third-party logistics providers.

Are these disruptions transitory? What is the time frame for recovery?

Some costs are transitory, others are not. Ocean freight is at record levels. Some lanes, such as Shanghai to LA, have seen container costs go up 4 to 10 times. In my view, those will be transitory not in the short term but in the medium term. Contracts are negotiated from February through April every year and put into effect in May. Contracting will be difficult for retailers and manufacturers in 2022, because I don’t think the demand will go down before then. They’ll be faced with high costs continuing into next year, but in 2023 we will likely see ocean freight return closer to normal levels for two reasons: first, demand will be mitigated. The other is that ocean lines will put more ships into service.

With domestic transportation, rate increases are here to stay, primarily because rates are driven by truck drivers’ availability. I don’t think truck driver pay will go back down to $45,000 a year. Domestic costs are embedded for the longer term. There’s also warehouse worker pay. There are $15-an-hour wages that have been passed in many locations. But in hot markets around the U.S., wages are already above that. These $16-to-$17-an-hour rates for entry-level warehouse workers are here to stay.

How much of these costs will be carried over to consumers and what decisions do retailers need to make to recuperate from rising supply chain costs?

The cost of goods could be 70% of the retailer’s P&L. That’s impacted by freight. Cost of goods is going up. Some retailers are reporting lower margins. Others are just increasing prices and offsetting some of that margin. The other expenses, typically outbound freight and warehousing freight, is usually put in the selling, general, and administrative expenses line.

Those costs translate almost directly into P&L impacts, but they’re not the biggest lines there. Cost of goods, real estate occupancy, and store labor all tend to be bigger pieces of a retailer’s P&L than just the supply chain costs. But those costs are big enough that retailers are reporting an impact on earnings. For 2021 fiscal reports, we’ll see lots of retailers talk about increased costs on their gross margin and profitability. Late 2022 we’ll see those impacts lessen.

How have sophisticated retailers been responding to the current challenges and what actions have they taken? What has worked and what has not?

The best retailers reacted quickly when they saw this happening. They lengthened their lead times. Where they could, they placed orders with Chinese factories earlier.

Some retailers chartered private vessels. That is a pretty small solution. I understand their reasons for doing it, but it’s expensive. For some of the most critical goods that are discretionary, that after the holiday are facing large markdowns, chartering vessels makes sense. I believe that’ll continue into next year.

The other is sourcing. When you think about the strain on the ocean freight lines, you can redirect sourcing to Mexico or Latin America, or make more use of rail. Smart retailers are looking at all their sourcing contracts and asking, “Can it be produced domestically? Can it be produced in an adjacent country where ocean freight doesn’t have to be used?” Companies are taking all these steps, but definitely lengthening lead times. Smart retailers are trying to get ahead, not expecting the ports to operate the way they have in the past.

What are the key capabilities that retailers need to develop to build resilience in the supply chain?

Previously, it was more about just-in-time supply chains. Those efforts have made major strides in helping retailers and manufacturers with profitability and lowering asset costs and inventory investment. Just-in-time has been a new way to operate because Wall Street looks at return on assets as part of its scorecard for retailers. I don’t believe just-in-time practices will go away. It’s just too difficult to find the capital to invest in inventory warehouses and trucks. Supply chains will stay lean.

But in terms of resilience? Clearly forecasting with partners and having more detailed plans. Ocean carriers will go from monthly to weekly shipment planning. Ports are operating more hours. I do believe that 24/7 will become the way of the supply chain in the future. Because of the strain on asset costs, it’s unrealistic for most companies to go out and invest in more trailers, trucks, and warehouses just so they have more days of supply of inventory. So resilience will come through better planning and technology.

What issues or priorities will be at the top of the agenda for chief supply chain officers at large retailers?

Number one is, “Get the goods on the shelf for the customer.” Goods lose value if they’re not on time. Supply chain executives are limited by cost, but they’ll pull every lever they can to get the goods on the shelf. Still, we’ll see retailers that don’t land all their goods on time. That’s a difficult challenge for chief executives to meet. People probably won’t breathe easy until next summer. The supply chain really has until next July to get caught up for Christmas 2022. Chinese New Year, on February 1, is a key day. Watching the number of containers off the coast every week up through that time will be an important activity to be able to forecast if we’ll see a significant recovery in the delays.

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About Gary Maxwell

Gary Maxwell is an innovative supply chain leader with extensive global experience in logistics, merchandise distribution and replenishment, logistics engineering, inventory management, offshore replenishment, profit and loss management, process improvement, and strategic planning. Until March 2020, he served as Chief Supply Chain Officer at Dollar Tree and was responsible for end-to-end supply chain operations including import consolidation, ocean freight, domestic transportation, inventory replenishment, warehousing, and store distribution. Before then, he was President and founder at Maxwell Value Chain, a consultancy focused on replenishment services and supply chain improvements. Previously, he was with Walmart in various executive roles in supply chain. In his latest role as Senior Vice President, Global Business Process Team, he was responsible for identifying global best practices for supply chain and inventory flow in the Walmart networks and reapplying to high-return markets.

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This retail industry article is adapted and translated from a GLG Teleconference. If you would like access to events like this or would like to speak with retail industry experts like Gary Maxwell or any of our approximately 1 million industry experts, contact us.

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Full List of Questions Addressed During the Teleconference:

• We are hearing of supply chain disruptions and challenges daily. So what is your reaction to the current situation?
• What are the key drivers of current issues in ocean freight?
• What’s happening with domestic transportation and what’s causing the challenges?
• How much does the labor shortage account for the challenges in the supply chain?
• Are these disruptions transitory and what is the time frame for recovery?
• How much of the cost will be carried over to consumers and what decisions do retailers need to make to recuperate from rising supply chain costs?
• How have sophisticated retailers been responding to the current challenges and what actions have they taken? What has worked and what has not?
• What are the key capabilities that retailers need to develop to build resilience in the supply chain?
• Is there a way to pressure-test the level of resilience in your supply chain? And what are some of the indicators that demonstrate the health of your supply chain?
• Are supply chain visibility tech solutions addressing the current pain points? How are they solving the issues around the current supply chain visibility as well as the prediction?
• Has the disruption impacted companies like Amazon at all, given that it owns a lot of its own logistics infrastructure?
• Do you expect any potential or additional long-term changes in retailers’ strategies in sourcing, merchandising, or logistics planning?
• What issues or priorities will be at the top of the agenda for chief supply chain officers at large retailers?