News May 05, 2023
Industry Executives: The Supply Chain Crisis Is Over
Suppliers explain why inventory has recovered and reveal both the continued challenges they face and lessons learned along the way. They also offer a pricing outlook and discuss sourcing diversification efforts.
Pat Noonan isn’t afraid to say unequivocally what he thinks about the state of the promotional products industry’s supply chain.
“We can confidently say that the COVID-19 pandemic-era supply chain crisis is over,” says Noonan, chief product officer at SanMar (asi/84863), promo’s largest supplier. “It’s important, however, to note that while the pandemic-era crisis may be over, there are countless new and different supply chain challenges facing us.”
Noonan’s view is shared by other industry supply chain leaders who source both soft and hard goods. There’s a broad consensus that the DEFCON 1-level supply chain madness the industry experienced in 2021 and parts of 2022 has subsided. Still, certain issues that arose in the COVID era remain and others have emerged.
“While I would say ‘yes’ that the supply chain crisis is over for now, there are still lingering economic and geopolitical issues that could impact our supply chain moving forward,” says Pierre Montaubin, chief product and sustainability officer at Top 40 supplier Koozie Group (asi/40480). “We need to sleep with only one eye closed these days.”
Why do supply chain leaders believe the COVID-age crisis has concluded? What does that mean for industry inventory levels and the prices suppliers charge distributors? What lessons did suppliers learn, and what sourcing challenges do they now face? Top executives offer perspective.
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A Stabilizing Supply Chain
Global supply chains across industries were a mess in 2021 and parts of 2022.
A recap: Production delays at overseas factories caused by everything from high demand to mandated COVID shutdowns. Vessel congestion and cargo backups at ports. Not enough space on ships transporting products to North America. Raw material shortages and price hikes. Labor shortfalls here and abroad. Longer time needed to transport products domestically by truck and rail. Inadequate supply of cargo-carrying containers and soaring costs for those containers.
These and other factors manifested amid an economic bounce-back that followed the gross domestic product cliff-drop that occurred in the early days of COVID and its related societal shutdowns in 2020 in the U.S. Supply chains just couldn’t keep up.
10.7 Million
The number of 20-foot containers that passed through the Port of Los Angeles in 2021, a record tally that was up 13% from the previous record set in 2018. The heavy cargo traffic created port congestion that contributed to inventory replenishment challenges for promo.(Port of Los Angeles)
The repercussion for promo suppliers and other importers was that it became exponentially more expensive and took longer to produce product and ship it to North America. And when product did arrive in supplier warehouses here, popular items sold swiftly as distributors raced to meet buyers’ needs. End-result: Migraine-inducing inventory shortages and higher prices on promo products.
Even so, the situation progressively improved through 2022. And as of the second quarter of 2023, suppliers say many of those major pandemic headaches have abated significantly.
“We can confidently say that the COVID-19 pandemic-era supply chain crisis is over.” Pat Noonan, SanMar
Take ocean transport time, for instance. Jeffrey Nanus, CEO of Norwood, NJ-based eco-friendly hard goods supplier AAA Innovations (asi/30023), tells ASI Media that during the height of the crisis, ocean cargo took between 65 to 120 days to arrive. Now, it’s back to a normal 30 to 35 days, he says. “For us, factories are shipping in a timely manner and ocean cargo has returned to pre-pandemic delivery times,” Nanus relates.
Domestic port congestion has largely ended, too. The Marine Exchange of Southern California reported in December 2022 that the vessel backup at the neighboring ports of Los Angeles and Long Beach that had climbed to a high of 109 ships in January of that year had fallen to zero.
12/9: No backup. Several open anchorages. pic.twitter.com/jS4zlxszYx
— Marine Exchange (@MXSOCAL) December 10, 2022
“While lingering risks of shutdowns due to COVID in certain provinces in China could disrupt the chain for certain commodities, I would say that in terms of cost of containers and booking space on shipping lines we’re back to normality,” says Peter Hirsch, president of Houston, TX-based Top 40 supplier Hirsch (asi/61005).
On shipping costs: As of early May, the average cost of a container to ship product from China/East Asia to the North American West Coast was $1,697. To the East Coast, the average cost was $2,516, according to the Freightos Baltic Index, a global freight rate tracker. Compare that to the third quarter of 2021, when the crush of demand caused containers from China to cost more than $20,000 to the West Coast, and in excess of $22,000 for East Coast-bound containers, Freightos data shows.
Average Cost of a Container Shipped From China/East Asia to North America
The lower container prices and quicker transport times are, in part, a result of declining overall inbound freight activity. When comparing current ocean freight orders leaving from all ports in the world and arriving at all ports in the United States, year over year, the levels are half, CNBC reported in late April. The drop has occurred amid growing economic uncertainty, consumers directing a higher proportion of spending to services (instead of products) than they did during the homebound days of the pandemic, and companies (including mega retailers) pulling back after overstocking in the post-lockdown inventory importing blitz.
In another pivotally important development for promo supply lines, executives say that it’s generally the case that overseas factories they partner with again have the bandwidth to fulfill orders efficiently. “There’s broad apparel production capacity available today,” says Noonan.
“Barring a resurgence of shutdowns or another type of major virus, we don’t see an issue on production at this time.” Jing Rong, HPG
That’s helping enable the factory-level turning of orders in timeframes considered to be pre-COVID norms. Nanus, for instance, says normal and current production is 45 to 60 days out of China, which is where the majority of promotional products sold in North America are manufactured.
The production picture was progressively clearing though 2022 but brightened considerably late last year after Beijing lifted its zero-COVID policy, which had centered on swift lockdowns of areas, cities and port infrastructure if even a few cases of COVID were detected. The societal unshackling from those policies has helped factories return to greater operational predictability and efficiency, analysts say.
China’s official index of manufacturing activity, based on surveys of purchasing managers at companies in the country, soared in February from the month before to its highest level in more than a decade. Activity tempered in March and April, but that appears to be in part driven more by possible economic challenges dampening demand, rather than a lack of Chinese manufacturers’ ability to produce.
Jing Rong, vice president of global supply chain and compliance at Top 40 supplier HPG (asi/61966), tells ASI Media that the firm isn’t experiencing issues with product manufacturing at the factories with which it partners abroad. “Barring a resurgence of shutdowns or another type of major virus,” says Rong, “we don’t see an issue on production.”
Suppliers: Inventory Is in a Good Place
Suppliers say their 2023 inventory levels are the strongest they’ve been since the onset of COVID-era stock scarcity in the industry. No executives ASI Media spoke with expect significant stock shortfalls this year, as of now.
“We’ve seen our inventories dramatically improve over the last 12 months,” says Pat Noonan, chief product officer at Top 40 supplier SanMar (asi/84863). “We don’t forecast any major inventory challenges for the year ahead, but if anything, we’ve learned during the pandemic to be really humble about predictions.”
True, inventory is never perfect. Some suppliers say they’re overstocked in certain items (hand sanitizer, for instance) and wish they had more of other categories (backpacks, one supplier mentioned). However, overall, distributors should continue to have an easier time securing the products they want at the levels they desire this year than they did in 2021 and parts of 2022.
“Our inventory levels are just right at the moment,” says Liz Haesler, global chief merchant with Top 40 supplier Polyconcept North America (PCNA, asi/78897). “We have deep inventory levels in our top sellers. It’s something we work on daily.”
Are Suppliers Going To Drop Prices?
As word on declining shipping costs has made the rounds, the question has reared: Will suppliers be reducing the prices they charge distributors for products? After all, the reasoning goes, those costs helped fuel price increases in the darker days of COVID, so why wouldn’t they now contribute to decreases?
Unfortunately, supplier executives say, the arithmetic isn’t quite that simple, and widespread price reductions don’t appear likely – at least in the short term. Still, certain suppliers say they have reduced pricing on select items, such as bigger/bulkier goods that were among the products most affected by freight hikes.
“We rely mostly on retail brands, and our pricing moves in concert, so in some cases prices have been reduced, such as with items like coolers that take up a large amount of volume per piece in a container,” says Hirsch.
4.8%
The year-over-year percentage increase in labor costs in the U.S. in the first quarter of 2023 compared to Q1 2022, as strong wage gains continued in a tight labor market. (Employment Cost Index)
Koozie Group monitors pricing on a case-by-case and category basis and tries to decrease where it can, says Montaubin. “We just dropped prices on a number of chairs, which were hard-hit by freight increases because of their weight,” he states.
Nonetheless, category-spanning price drops don’t seem to be in the cards just yet. Skyrocketing shipping/container costs were just one reason that promo product prices increased in North America in the COVID years. Elevated labor expenses, higher prices for raw materials used to make products, greater manufacturing costs and other inflationary factors also contributed.
Domestic labor rates continue to rise, increasing 4.8% year over year in the first quarter of 2023, federal data shows. Then there are other cost weights that have come into play: Some suppliers say they’re investing more in tech-fueled service offerings and geographically diversifying where products are made (see section “The Push for Sourcing Diversification”). They’re also putting more money into things like cybersecurity and rigorous oversight of their supply chains to ensure compliance with social and environmental standards, including raw material traceability mandates.
“We’re investing in new partners and technologies to improve traceability and visibility across our entire supply chain,” says Noonan. “As we grapple with high costs in the U.S., we’re making new investments in technologies to help our warehouse teams be more efficient and accurate than ever in processing orders.”
A Look at Inflation
Inflation has cooled but prices are still trending up year over year. The Personal Consumption Expenditures price index rose 4.2% for the 12 months ended in March. The Producer Price Index, a gauge of U.S. inflation at the wholesale level, was up 2.7% this March compared to last.
Those factors are contributing to keeping pricing at current levels for the time being. Other elements adding to the pricing status quo are in play, too.
For instance, suppliers may still have inventory bought when costs for shipping and other elements that factor into a product’s price like raw materials were higher. As such, they need to sell through that stock at a price that allows some margin based on what they paid.
Speaking of margins: Certain supplier executives say their firms refrained from lumping the full burden of the cost increases they were experiencing on distributors during 2021 and 2022. “The freight impact alone was much higher than what we passed on to our customers,” says Liz Haesler, global chief merchant with Top 40 supplier Polyconcept North America (PCNA, asi/78897).
The practice of not hitting distributors with the full brunt of cost increases eroded margins for suppliers. In cases, the margins simply weren’t sustainable for the long-term viability of their businesses but were endured in the short term to get through the rough patch.
“The perfect storm of supply chain pricing pressures had significant impact on overall supplier profit margins and I think some suppliers will hold price for a little time to recover some lost margin,” says Yuhling Lu, co-owner of Top 40 supplier Ariel Premium Supply (asi/36730). “Suppliers don’t feel pressure to lower prices because there doesn’t seem to be any major push back from end-buyers that would create reverse pricing pressure.”
Suppliers with which ASI Media spoke emphasized that they’re always monitoring pricing and looking to play fair with distributors. “Our goal with pricing,” says Haesler, “is to minimize any impact to our customers while maintaining quality and inventory levels.”
Contending With Challenges
While the supply chain crisis has concluded, sourcing challenges persist.
As executives alluded to in the discussion on pricing, inflationary pressures continue to clamp, including fuel surcharges and supply expenses, says Lu. Another factor? “Labor costs in the United States are higher than ever,” adds Noonan. Also on labor: It’s been somewhat easier to hire of late, which has helped reduce labor shortages, but personnel count at some supplier firms and their supply network partners are still not ideal. “Labor is an ongoing challenge across the globe,” says Haesler.
While much improved, factory reliability and production remain pain points at times. “We’re still experiencing some delays, mostly at the factory level, which puts pressure on logistics, specifically causing us to explore faster methods to get the product here, to meet the demands of our customers,” shares Haesler. “The most significant delays we’re seeing are outside of mainland China.”
“While I would say ‘yes’ that the supply chain crisis is over for now, there are still lingering economic and geopolitical issues that could impact our supply chain moving forward. We need to sleep with only one eye closed these days.” Pierre Montaubin, Koozie Group
Geopolitical instability is in play, too. The political relationship between the U.S. and China is frayed and tense. Russia continues to make war against Ukraine. Potential fallout from these and other international issues represent “real and significant challenges to our supply chains in 2023,” Noonan states.
Given all the dynamics in play, sourcing leaders and their teams need to act more nimbly than ever to keep promo adequately stocked. “We’re in constant communication with logistics providers as well as product suppliers to review the current state and future conditions to make proactive decisions on inventory levels and assortment,” relates Teresa Fang, vice president of supply chain at Top 40 supplier alphabroder (asi/34063).
For sure, forecasting is another sizable hurdle.
The uncertainty on whether a recession will strike – and how bad it will be – complicates sourcing and makes it more difficult to establish a good balance on inventory levels, executives say. On the one hand, you need enough of the right products, but on the other you don’t want loads of cash buried in items that are going to sit on shelves amid a downturn in the economy. “The big issue is economic uncertainty,” says Rong.
Further clouding the forecasting crystal ball is how fast product trends can come and go these days. “A main challenge is to be flexible enough so we’re able to adapt to customer habits and new curveballs thrown our way,” says Montaubin. “We need to be constantly evaluating our assortment based on customer feedback. For example, blankets were a huge craze in 2021, but less so in 2022. Predicting and offering the right breadth of product in categories like these is a delicate balancing act.”
Sourcing leaders and their teams are also investing ample time, resources and money into ensuring their supply lines are free from factories and providers using forced labor and/or engaging in practices that run afoul of sound environmental practices.
Not only is this important from a moral and ethical standpoint, it’s also a matter of mandate. For instance, it’s essential that no part of a supplier’s sourcing network touch Xinjiang after the U.S. federal government began enforcing the Uyghur Forced Labor Prevention Act, which bans imports from that region of China due to the belief that slave labor exists there.
“In terms of supply chain, the greatest challenge for hard goods suppliers is to find competitively priced, reliable factories outside of China,” Nanus opines. “We’re working with factories in other parts of Southeast Asia to find options, but it’s very difficult.”
The Push for Sourcing Diversification
Nanus alludes to a phenomenon that started before COVID but was accelerated by the hair-on-fire madness of pandemic sourcing fiascos: Suppliers are working to reduce their reliance on China as a sourcing destination and moving some production to other countries.
Import tariffs implemented under President Donald Trump and the aforementioned geopolitical issues have spurred the movement. So has the imperative to minimize disruption risks that come with being overly vested in one geographic locale for production – a vulnerability COVID laid bare. There’s also the desire to find the most cost-effective labor and to relocate some manufacturing closer to North America, hastening the speed with which product can reach market.
Beyond the Red Dragon
China remains promo’s top international destination for production. Outside China, suppliers that import say they most frequently source from the following five countries.
1. Vietnam
2. India
3. Mexico
4. Bangladesh
5. Indonesia
(ASI Research)Apparel suppliers have in particular diversified their sourcing destinations. SanMar, for example, is no longer adding new factories in China and less than 10% of its production is sourced there. “We’re seeing growth in South Asia, Africa and the Western Hemisphere – a trend that will likely continue in the years ahead,” says Noonan.
Rong says HPG is ramping up sourcing activity in Asian countries. “Vietnam is known for sewing, India for technology products,” she says. “We’re aggressively looking to alternatives to China.”
Haesler shares that PCNA already sources all its apparel from outside China and that progress has been made in finding non-China-based sources for other products, including bags and stationery. “We continue to expand our options in India, Bangladesh, Indonesia and Vietnam, as well as exploring new opportunities in Central America and South America,” Haesler says.
According to Montaubin. Koozie Group domestically prints, assembles and manufactures a “large portion” of its products, from writing instruments to paper goods like calendars.
For imported items, Koozie Group is “always exploring alternative sourcing locations, including countries in Southeast Asia as well as Latin America,” Montaubin says, adding: “One of our priorities remains the wellbeing and treatment of the employees in the factories we work with, stemming from our Fair Labor Association commitment, so we’re taking this exploration slowly and would have to make sure we have all our bases covered before making a switch.”
Relatedly, Montaubin and others say that, despite diversification efforts, China remains the primary sourcing nation for the North American promo industry – and likely will continue to be. “We believe it’s important to shift certain categories of manufacturing from China – such as bags – however this process will take years,” says Hirsch, whose firm is considering manufacturing options in Cambodia, Taiwan, Vietnam and possibly Mexico. About 95% of Hirsch items come from China.
94%
of suppliers who import say they do at least some of that sourcing from China.(ASI Research 2022 State of the Industry Report)
Lu notes that some product categories, like technology items, could be harder to source from outside China, while raw materials may still ultimately be sourced from China even if they’re turned into end-products elsewhere, which could contribute to longer lead times. Also, she says, alternative countries don’t have China’s infrastructure – or necessarily its other workforce advantages. “Skills and capacity in some countries like Vietnam and Cambodia are already an issue,” Lu states.
Nonetheless, Fang feels that as countries outside China continue to grow and improve their infrastructure, more opportunities for suppliers to diversify sourcing will arise. “China-sourced items,” Fang says, “remain the majority but through ongoing diversification efforts the reliance will become less.”
6 Supply Chain Lessons From the COVID Crisis
Beyond increasing sourcing diversification efforts, suppliers say they’re acting on other lessons birthed or reinforced by the rigors of the supply chain crisis. Here are six.
1. Hold More Inventory: Perhaps the best product is one that’s available. Amid stock shortfalls and delays in delivery from overseas providers, sourcing pros got proactive, ordering greater quantities of product further in advance than in the days before COVID-19 – a practice that ultimately helped improve inventory availability.
Not wanting to get caught short again, many suppliers say they now carry more stock than they did before 2020. “We have 50% more inventory on hand than before the pandemic,” says Nanus of AAA Innovations.
Adds Hirsch: “We’re keeping higher inventories than in the past.”
Koozie Group’s Montaubin states: “We’ve brought in deeper inventories of our top-selling products and introduced new items based on customer feedback. This approach has allowed us to get back to stable standard production times and turn on 24-hour service faster.”
“You need to have enough options from a carrier perspective so that you’re never put in a position where you have goods sitting overseas for 60 days.” Liz Haesler, PCNA
2. Improve Communication With Distributors: During the crisis, dynamics were always changing for suppliers and distributors. Product availability, order fulfillment times – the consistency on such things that existed before the pandemic just wasn’t there. Recognizing this, proactive suppliers sought to communicate better and be more transparent with distributors – something executives say they’re continuing to do.
“We have learned to become better communicators with our customers,” says Ariel’s Lu. “For example, we created a new page on our website that provided very specific production time information by product category, imprint method and production location. We never had this before, but it really helped manage distributor expectations early in the process. Given the number of products and processes we offer, balancing the correct information throughout was the challenge and all of it had to be timely and accurate, even though the variables were constantly changing.”
To help enhance communication with customers, AAA Innovations hired additional logistics personnel to track the delivery of every container. “With daily updates from logistics, we incorporated new software to determine if any potential ship dates would be affected by ocean cargo delays and we then automatically notify our clients of any potential delays,” says Nanus. “Clients understand there are issues beyond anyone’s control, but they just need to know well ahead of time.”
3. Forge Strong Supply Network Partnerships: Haesler articulates a common view among sourcing leaders when she states that, during times of relative normality, it’s essential to develop strong relationships with factories, sourcing partners, carriers and brand partners so that when tough times hit, you can better collectively navigate them together. “These relationships make the difference when you’re working to get your product here for customers,” she says.
Noonan concurs. “The close strategic partnerships we built during the good years were exactly what we relied on the most during the toughest times of the past three years. Our partners knew they could count on SanMar (and vice versa) and we were able to genuinely work together to navigate a difficult period in the best possible way for everyone. That allowed us to keep goods moving, keep people employed, and mitigate cost increases to the greatest extent possible.”
4. Plan & Be Adaptable: “We created contingency plans with more automation and leveraged our technology to provide more transparency and the ability to self-serve to better serve distributors,” says alphabroder’s Fang. Supplier leaders say continuing to plan for disruptions is a must, with the understanding that all ends can’t be foreseen and that it will be necessary to adapt quickly amid particular circumstances to keep business moving.
Relatedly, it’s important to come out of crisis mode and to build and execute a plan for the future. “Some key ingredients to our future success are investing in employee retention and imprinting technology,” says Montaubin. “As important has been delivering an enhanced customer experience with enhanced features in our Koozie Group Tracker for monitoring order details.”
5. Have Back-Ups & Redundancies Along the Supply Chain: Similar to diversifying geographically, suppliers say it’s important to have backup options like multiple factories from which to source key products. “You need to have enough options from a carrier perspective too so that you’re never put in a position where you have goods sitting overseas for 60 days,” says Haesler.
6. Take Advantage of Chaos: Norm-destroying upheaval can present an opportunity to innovate. That’s just what some suppliers did – and what they’ll look to keep doing. “We used this crazy time to develop a strategy to transition all of our umbrellas, bags, outdoor chairs and tents to eco-friendly materials,” says Nanus. “We built a plan to offer sustainable products at the same quality level without raising prices.”