As you’ve undoubtedly heard, the world has supply chain crisis on its hands.
Think of the supply chain as a giant international highway. Right now, there is a historic traffic jam preventing goods from navigating through it.
How did this happen?
Now you’re asking the tough questions. At its core, the pandemic was the first domino that triggered the “bullwhip effect” leading to the global shipping jam.
What is this bullwhip effect? It is when changes in demand at the retail level or supply up the chain cause even larger changes all across the supply chain (transportation, logistics, and manufacturing). A more detailed definition can be found here.
So how did the current global economy get “bullwhipped”?
1.The Pandemic put a huge burden on manufacturers and shippers, as they lost employees to sickness or had to change their operating procedures for social distancing
2. Many countries needed to import masks and protective gear, or their citizens bought more retail goods online with their government stimulus checks (e-commerce grew to over $26 trillion)
3. Manufacturers, having pared down their operations, failed to produce the necessary amount of goods to match retail demand
4. Empty containers piled up at import countries around the world as shipping companies were unprepared to return the containers
5. Without containers, the largest export countries are unable to store goods to ship overseas
6. The price of manufacturing and shipping has increased to reflect the lack of supply of available goods and transportation space
Supply changes from the pandemic, made the retail market less predictable than normal, leading to fewer available goods and transportation options around the world, ultimately raising prices.
This can be seen specifically as manufacturers are having production shortfalls of 75% and the Logistics Manager Index (tracks overall logistics prices including transportation, warehousing and inventory) reached a record in November, up 14% over the year prior.
Cargo ships waiting off the coast for access to the LA Port — Mario Tama, Getty Images
What are possible effects on my business?
You may have noticed that it’s taking longer for your goods to arrive, or the cost of importing your goods is more expensive than usual. The increased upfront cost of importation is the first and easiest cost to calculate, but how is the extra transportation time affecting your costs? Your revenue lost by not being able to restock a sold out good is called your stockout cost. Your stockout cost depends on the types of goods you sell and how long it takes you to restock them. To figure out the basic cost of a stockout to your business, use the following equation:
Days Out of Stock X Average Units Sold Per Day X Price Per Unit
There is also another sneakier cost of stockouts; potential damage to your relationship with your customer. You need to determine the cost of not having an item available — or it taking longer than expected to get to the customer — and the impact this has on your customer relationships.
The average cost of customer acquisition is $10 (for all retail goods) to $129 (for smaller apparel shops). On top of this, some of your customers may make shopping decisions based on what you have available in your store; 34% shopped at a new brand in 2020, with nearly a third citing item availability as the reason.
In total, the “Bullwhip Burden” on your business can be captured with the following tidy formula:
Increased Import Cost + Stockout Cost + Potential Lost Customer Cost = Bullwhip Burden
What can I do to minimize the effect on my business?
The supply chain crisis may seem like a giant, existential problem that is impossible for you to solve (unless you’re Amazon and can buy your own cargo ships). The good news is that there are steps you can take to better manage this risk.
So how can you get inventory back in your possession and on the shelves more quickly?
You have a couple of different levers you can pull. In addition to paying to expedite a shipment, or starting to forge relationships with additional manufacturers, you can consider the goods that are sitting in your customers’ homes waiting to be returned or exchanged as another inventory channel.
Focusing on your returns policy and processes can help you mitigate today’s supply chain disaster. Review and fine tune your returns policy and processes. Do you have a dedicated returns team or a returns provider? To learn more about optimizing your return policy, check out “ Should I Offer Free Returns?”.
Incentivizing returned inventory can get products back on the shelves fast. At Boomerang we have seen with our customers that enabling quicker returns through at-home pickup (which also provides a great customer experience) can get your item enroute in 5 days compared to the 27 days it usually takes a customer to get themselves to a UPS Store, FedEx Office or Post Office to return the good.
Will this solve all of your supply chain backup issues? We really wish it would! However, it will definitely put you in a better position than most retailers as we wait for the supply chain to fix itself.
In further good news, there is a light at the end of the tunnel. The supply chain will eventually iron itself out as more investment goes into shipping and manufacturing to balance the demand shortage. $17 billion has already been invested into port infrastructure projects next year in the US. This combined with more capital pouring into production capacities means that production and transportation should be more in line with retail demand in 2022, lowering prices back to pre-pandemic levels.
Here at Boomerang we want to turn your returned inventory back into sales as quickly as possible, especially during this supply chain upheaval. To learn more and schedule a demo, visit our website here.