Special Feature - Supply chain challenges

It’s time to build resilience into your supply chain

Suppliers will face ongoing higher container rates, but they can do more to help themselves overcome supply chain issues, a webinar co-hosted by Toy World has heard.

The free event, attended by over 280 suppliers and retailers from across the UK and worldwide, also heard from a logistics expert who believes that, despite many suppliers feeling they were being held over a barrel with increasing freight costs, the shipping industry was not acting as a cartel.

Entitled Supply Chains, Transportation and Toys: thoughts into the future, the session was a collaboration between Toy World, the British Toy & Hobby Association and The Toy Industries of Europe.

Attendees heard from panellists Professor John D Mangan, who holds the chair in Logistics at the School of Engineering, Newcastle University and Iain Prince, who heads up KPMG’s Supply Chain team. Both pulled no punches about the challenges that still lie ahead, while also suggesting the worst of the volatility, poor service and huge price rises may at least be behind us.

However, anyone hoping that shipping costs will return to pre-pandemic levels any time soon were soon disavowed of that notion: it was generally felt that container prices will fall slightly in 2022, but would settle quite a way above the low rates that suppliers enjoyed back in 2019.

And it is a real worry for many suppliers: a survey carried out by KPMG of over 1,000 CEOs in the retail and consumer sector globally, revealed that supply chain issues is one of the top three items on the agenda of the board, and also in the top three risks.

“I know you are suffering, and you have suffered,” Prof Mangan told the webinar, adding that it had been a “perfect storm” earlier this year with the blockage of the Suez Canal by the Ever Given and port closures and congestion due to Covid-19.

He told the webinar: “Realistically, container rates are not going to drop down to pre-Covid levels of £1,000 - £2,000 per TEU. However, they probably won’t stay as high as they are; they’ll moderate down a bit next year.”

Prof Mangan pointed out that the shipping sector is notoriously slow to change, and that global pressure for the logistics sector to reduce its carbon footprint would ultimately have to be funded by the companies using the shipping services, rather than the shippers themselves.

“It’s a huge transition that will have to be funded and unfortunately when it comes to who funds it, the simple answer is it you – companies that use shipping services. The shipping industry isn’t a charity.”

Reinforcing that the problems of increasing costs and unreliable service have affected all consumer goods importers, not just toy companies, the webinar heard that new shipping capacity would not be coming on stream until 2023, making any significant rebalancing in the ‘supply and demand’ equation unlikely next year.

Compounding the situation, Clarksons, which provides data for the shipping industry, has predicted container trade to grow by 6% in 2022.

“The shipping industry is notoriously cyclical – new capacity comes and demand falls,” said Prof Mangan. “Containerisation is set to grow further – it has to – but we need to mitigate risk, and I think this has to start at supply chain level. We can’t just blame shipping. Shipping does what markets do – react to supply and demand – and our job as importers and exporters is to work around that.”

Iain Prince added: “China is building some huge ships; capacity will increase in 2023/24 and they are actually starting to take control of their own logistics. Amazon is doing the same thing. Logistics is going to become a commodity, so everybody has got to watch that and change their 2022 budgets and plans.”

He told the webinar how one major shipping line had seen its profit increase five-fold on the same revenue during the pandemic, despite providing patchy service to its customers. “It is not going to change for the next year or two,” he warned.

Both men agreed that labour shortages across the entire supply chain – not just in the UK, but in Europe and the US too – would continue to be an exacerbating factor, hinting that it could take three or four years for the global labour market to rebalance.

Here in the UK, an HGV driver who would have expected to earn around £35,000 a year ago can now easily command £50,000 or even more. The shortage of drivers has not only led to a steep rise in their remuneration, but has also had a knockon effect across other areas of the supply chain: for example, warehouse workers now expect to be paid more as a consequence of the increase in drivers’ pay.

However, despite the gloomy prognosis, both panellists said companies could do more to make their supply chains more resilient, including taking a far more proactive role in assessing daily developments.

Prof Mangan urged suppliers, when being told by their freight forwarders that their stock was stuck on a ship in the Straits of Malacca, for example, to use tools which are available such as marinetraffic.com where the position of vessels around the world can be seen in real-time. “Ask what the name of the ship is,” he urged, “because this free tool can identify any vessel, anywhere.”

He said companies should set up supply chain ‘control towers’ to gain resilience, while Iain urged suppliers not just to think about the product, but to think of all the indirect items, when making the product. “One of the biggest automated warehouses in the UK stopped because they had no boxes,” he said.

Iain also warned of the need for supply chain visibility, saying it was “absolutely key”. “You might outsource your supply chain or give it to a third party, but never ever abdicate responsibility for your supply chain. That’s where all the problems happen,” he said. “Get a map of the world on a screen and actually use it in your business. It is invaluable.”

There was also a consensus amongst the panellists that companies should take this opportunity to review their business and operating models, looking at where their suppliers are located, possibly spreading the risk by extending the manufacturing base, or even by importing components and assembling them here in the UK. Reshoring was discussed, with an acceptance that exploring factories in countries closer to home could prove beneficial in certain cases, with extra labour, shipping and distribution costs from China potentially offsetting traditional savings made by sourcing in the region.

“People are diversifying their geography. We’ve seen a big increase in North Africa and South America – it might have been 20-30% more expensive two years ago, but as soon as you add on distribution costs it brings an equilibrium back,” said Iain.

“Look in your wider supply chain, map that out, understand the risks and any issues you have got there and put in some mitigating elements. Finally, understand wider external government and economic factors that you can’t impact, but you will need to make some mitigating actions for, such as Brexit.” He added: “Engage your board and engage the finance function, so you can budget for it. It is a business issue.”

Retailers will also have a key role to play in maximising supply chain efficiency: ‘just in time’ ordering, which has become increasingly prevalent amongst certain major accounts, may no longer be a viable strategy. In addition, weak initial estimates that bear no relation to the likely quantities which will ultimately be required by a retailer are likely to cause huge problems; we saw this year how difficult it was to turn the tap on and off quickly, and pro-active ordering was infinitely more successful in securing stock at the correct time than reactive buying – the days of ‘jumping on’ lines late in the day may be over, at least in the short term.

Looking to the future, Prof Mangan said chartering smaller feeder vessels was not the answer, as has had been done by some larger companies at one UK port. “That is cost prohibitive – it’s like flying to China in a 20-seater aeroplane,” he said.

Along with more regulation that comes at a cost, will be geopolitical risks (the developing tension between China and Taiwan was specifically cited), biothreats, accidents, piracy, increased digitalisation bringing more risk of cyberattacks and extreme weather which causes parametric rolling.

When asked if he thought shipping was acting as a cartel, Prof Magan said he thought not and it was just simple economics. “There is no need to act as a cartel at the moment – it’s back to supply and demand,” he said.

One thing is for sure: the supply chain challenges we have seen this year are not going to disappear overnight, and suppliers and retailers will need to continue to look at managing their supply chains and planning carefully – especially with regard to how much is bought and when orders are placed.

With the situation likely to remain in flux for some while, Toy World, the BTHA and the TIE have all agreed that further webinars next year may be helpful to keep the toy community abreast of future developments, and we will keep you posted on future activity on this subject.