Webinar: The Disruption Dilemma

January 24, 2023

2022 brought relentless supply chain disruption: volatile demand, excess inventories and record-low warehouse and transportation capacity. Inflation and macroeconomic risk promise to make 2023 even more unpredictable.

Screenshot 2023 01 24 at 12 18 16 PM

Supply chain experts from Flexe, Prologis, Columbia Sportswear and Uber Freight discussed the coming year in supply chain. Hear their thoughts about 2023 predictions, supply chain challenges, trends and how to navigate an uncertain future.

Key Takeaways

  • Disruptions are more transformative and frequent
  • Covid made channel expansion necessary. After Covid, new channels like BOPIS remain permanent fixtures. Leading brands shape demand across channels
  • Recency bias skewed 2022 forecasts. Now, economic variables upend business cycles making future forecasting difficult
  • 2023 plans may be baked in, but how a brand operates isn't. Leading businesses use supply chain agility to rapidly adapt

Flexe edited the transcript for brevity and clarity.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

2022 brought relentless supply chain disruption, volatile demand, excess inventories and record low warehouse and transportation capacity amid increased inflation and macroeconomic risk that promises to make 2023 even more unpredictable.

Today, Flexe brought together expert panelists from Uber Freight, Prologis and Columbia Sportswear for a lively discussion. And what you can expect to learn is predicted 2023 disruptions in warehousing, transportation and consumer behaviors, as well as methods for deciding where to invest during disruption, disruptive periods and supply chain strategies to increase speed, agility and scalability.

So let's get started by getting to know our panelists, starting with you, Mazen. Tell us who you are, what you do, and what surprised you in 2022.

Mazen Danaf, Senior Economist, Uber Freight

Hello, everyone. I'm a senior economist at Uber Freight. I track the key supply, demand and economic indicators in general and develop forecasts in this volatile environment.

The most surprising and humbling thing for me was the speed at which the current Omicron outbreak happened and then disappeared. We were seeing about 1 million cases per day in January 2022, which was an unimaginable number. That number basically went to zero a few weeks later, in early March.

What happened in January crippled our economy and that cripled our ability to forecast as a nation. If you look at the transportation sector, we went from the most undersupplied market to the most oversupplied market in a matter of weeks, and prices were at a record high. And then suddenly, they had the most violent drop we've ever seen.

Karl Siebrecht, Co-founder & CEO, Flexe

Hi, everyone. I am one of the founders, and the CEO of Flexe. Lots of things were surprising about last year. I know, we’ll get into that here as we keep rolling.

Melinda McLaughlin, SVP, Global Head of Research, Prologis

I'm Melinda McLaughlin, the global head of research for Prologis, the global leader in logistics, industrial real estate and warehouses. There was so much, but maybe one big surprise was how quickly things changed. People were ready to get out there and spend, which kept inflation high and the Fed responded. It all happened much more quickly than we've seen in many decades.

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

Hi, Jason Trusley. I lead consumer strategy insights and analytics for Columbia Sportswear. You'll know us through Columbia, Mountain Hardware, Prana, Sorel. I continue to be amazed by the resilience of the consumer globally.

They just keep coming back to support economic growth, to support business growth. And if you're creating products, brands and experiences that matter, the consumer marketplace is a great place to be right now.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

We are going to start by taking a look back at the data, the disruptions in 2022. What can we learn from in 2022? What are a few numbers and stats that stood out to you in 2022? What do people misunderstand about the stats they saw in 2022?

Mazen Danaf, Senior Economist, Uber Freight

First, I’ll echo Jason, In 2022, we saw resilient demand both on the consumer and manufacturing side. But, to answer your question, when we saw the collapse in prices in the transportation sector, everyone was focusing on the demand story. They assumed inflation was taking a toll on consumer spending and impairing our consumers and businesses as well. However, we didn't see that when we looked at the data.

We saw spending was at a record high (except for Q4), and manufacturing output was also at a record high. People didn't focus on the supply story. There were a lot of supply swings, especially in the transportation and freight sector, which drove the significant changes we saw in the market. We saw a record increase in trucking employment, 5-6 million TEUs entering the market in the next two years and excess inventories. There was a huge supply overaction that was masked by Covid. When Covid disappeared it showed up all at once causing disruptions in the supply chain.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

What are some of the data points, or what are some of the data points that didn't hit the newsreel? What was happening that we weren't really talking about?

Melinda McLaughlin, SVP, Global Head of Research, Prologis

One thing that we learned is that there are different degrees of capacity constraint at every step of the supply chain. It can be as big as the workforce or as small as a chassis. And, there are so many interlinks.

One thing that wasn’t well-covered was the warehouse space. When inventories build, you need more warehouse space. When sales build and inventories are moving quickly, you need more warehouse space. And, it's becoming harder and harder to build it. It’s tough to bring online, so we have huge capacity constraints. The way we measure that is the vacancy rate and it's down to 3% this year vs. 4.5% pre-pandemic and a 6% historical low. Space has never been more scarce.

The one that’s well covered but I wanted to underscore is what happened after Russia invaded Ukraine with energy costs. It’s really a story of volatility. In Europe, at one point operations were paying 10X for their energy. If that big portion of your supply chain cost stack can be that volatile, I think it will influence business decisions for years to come.

Sarah Barnes-Humphrey

At the end of last year, we heard about possible rolling blackouts. With you being in the warehouse sector, what are you hearing on that front and what should supply chain professionals be aware of?

Melinda McLaughlin, SVP, Global Head of Research, Prologis

We have businesses in Europe and so far we’ve been lucky with the weather. We haven’t experienced rolling blackouts yet. Customers had to ask themselves, “when do I run my operations, especially manufacturing activities. They were trying to front load that activity to avoid running energy intensive operations when costs are at their peak.

Demand for renewable energies soared. We went overnight to having hundreds of calls about spaces with solar and do you have ways for us to be more efficient. Companies who were already well positioned with those operations naturally reaped the benefits.

It's part of the decision making and the collective knowledge now. What we're looking at as far as risk, like where are we spending our risk dollars because that also can affect manufacturing, you know, in the Far East as well with those rolling blackouts. And that's going to affect the supply that we're getting and the shortages that we're seeing on some of the shelves as well.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

So I want to turn to Jason and talk about some of the consumer consumer behaviors that you saw in 2022. What were some of the unexpected behaviors and what were the learnings from that?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

Well, I think I think it's fair to say that the the most unexpected finding is the resiliency that I talked about in my introduction, whether that's demand, whether it's patience around waiting for the next deal to show up, all those things are abundantly clear that the consumer is adopting this sort of transitory stance in virtually everything that they do.

And if I go back to the start of the pandemic in April of 2020, what are we going to do to transform operations, to create new experiences, to create new capabilities BOPIS, pickup in-store, all those sort of things. Everybody's digital transformation agenda. We went forward five years and we talked about this a lot.

I've probably been on 20 calls where everybody said, Oh yeah, my agenda is five years more mature than it was. Well, I don't know if that necessarily stuck. I think consumers are beginning to go back and question how many of those things that we created that our new offerings are really the ones that they want to continue engaging in.

And I'll look at the holiday season. Brick-and-mortar did surprisingly well in the marketplace over the holidays versus digital retail. That isn't just true for my industry. If you look across all apparel footwear, you look across electronics, you see it there. There's just this sort of focus on brick-and- mortar and the way things had been before. I think that this is part of a broader trend that we're seeing in the marketplace.

The topple rate of retail business models for consumers has doubled every two generations. In this era, there's an evolutionary process called punctuated equilibrium. We have long periods of status quo and rapid periods of change.

What we see in the data, what we see as sort of a consumer behavior as looking at the marketplace, is that periods of rapid change are much deeper in the depth of their change and much closer together. That isn't going to go anywhere.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

What were some challenges you were hearing from your customers in 2022?

Karl Siebrecht, Co-founder & CEO, Flexe

The difficulty of forecasting. It was a particularly difficult year to forecast, and there were at least two drivers of that. The first is continued Covid-related disruptions. On top of that, consumers' needs, wants, desires continue to evolve and that's not going away. That's always going to happen. But you pile that on top of the fact that we have these core supply and demand and demand disruptions, which has made it incredibly difficult to forecast.

One of the significant challenges has been related to that has been inventory levels. For a while there, there wasn't enough. In one of the first ripples in the bullwhip, suppliers shut down, transportation lanes shut down. We ran out of inventory. Then when that opened up, most retailers made the bet. I've got to go buy the inventory to make sure that doesn't happen again. And many of them have ended up in a position of too much inventory.

I'll give an example. You know, on top of sort of how much overall inventory do I need? We've heard from customers that say, well, then when I get into my actual distribution network are things like BOPIS, you know, Jason mentioned buy online, pick up in store.

Was that a temporary blip that was driven by Covid? Or is this a durable ongoing distribution channel that's going to continue to grow over time?

You know, I don't have a crystal ball. I'm not really sure. I know that a lot of research suggests that consumers value it. The economics to retailers are pretty good. But the way that has manifested itself with our customers is, hey, if BOPIS is growing, that's great.

But you may find yourself stocking out in your retail stores more quickly because you're pushing more product through each physical footprint. So what does that mean? I've got to replenish more rapidly. Maybe I was on a weekly cadence.

Now I need to be on a two day cadence with my fastest moving SKUs. So the implication is I've got to change my distribution network. I've got to typically add new distribution sites, at least for my fastest moving SKUs, kind of to forward deploy that inventory out further into the market.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

And bringing warehouses closer to that end consumer. That was something that I was hearing a lot about in 2022. Melinda, just before we get to you, I want to ask, Karl, are you hearing more just in case versus just in time?

Karl Siebrecht, Co-founder & CEO, Flexe

There's been a lot of just-in-case starting last year that rolled into very high levels of inventory this year. And so now, for many, we have all this inventory. Do we want to discount it and move it through? Do we want to save it and hopefully we can have this be next year's trend? You look at the public reports of major retailers, and inventory levels remain high as we sit here today.

Karl Siebrecht, Co-founder & CEO, Flexe

I want to know what Jason thinks about this: once you introduce an option, can you take it away? Like, can you say, we're not doing BOPIS anymore?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

There is an appreciation for the different consumer profiles now, and that they want these different experiences. I think retailers really have to plan for all of it, right? So you can't take it away once you've introduced it. Yeah, I think that's right. I think the consumers finding your brand often come through many, many different channels. They come through marketing, they come through the product and seeing the product on people that they want to be like. They want to be part of that.

And for some it's just about convenience. And so I'll take my industry as an example. Everybody went outdoors during the pandemic, and most people, like in the US, about 25 million additional people go outside versus 2019.

Now, a lot of those consumers came in from Columbia or North Face or Patagonia or whomever because of the new offerings around convenience. I can get this product in a convenient place for me. At the time, I wanted it in the place that I wanted and inventory was relevant and in the end product was clicking really well in the marketplace.

I don't think you can pull those things back at this point. I think it's now about how do you use the demand creation levers that are available to us to shape demand into those channels, which by the way, there's not a capability. Most companies have spent a lot of time thinking about and around distribution shaping rather than how to use marketing to create differentiation.

So I think that's going to be one of the things that we continue to struggle with in the industry across all formats of retail. How do I shape demand differently? Especially if you go back to the fundamental problem of forecast accuracy.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

Let's talk about forecasting accuracy and how it's been a challenge in 2022. What can we learn from what we saw in forecasting accuracy in 2022?

Mazen Danaf, Senior Economist, Uber Freight

I wanted to touch on two reasons that led to forecast inaccuracies in 2022. So the first issue is that we saw complete outliers in 2020 and 2021. These two years are complete outliers and because of our recency bias, we thought things would continue the way they were. That was the first mistake we made.

What you're seeing now is regression to the mean, where things are starting to go back to their long-term trends. There is still an effect of these two years, but they’re not what we thought they would be.

Secondly, it’s that sectors also operate in cycles, and we still fail to grasp the idea of cycles. And when we overlay economic variables and economic shocks on top of cycles, things get much harder to forecast in comparison.

When you look at like most of the forecasts, they're either straight lines like linear forecasts or even worse, they're just exponential forecasts that show growth forever. So this is what led to a lot of the inaccuracies in forecasts and the supply overreaction.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

But now it's time to get out that crystal ball and look at 2023 and beyond, providing some insight into 2023 predictions and how to make investment decisions in today's wildly uncertain world, which we've just been talking about.

Jason, start us off. How do brands figure out whether something is a trend or worth a long time business investment? What are you and your teams particularly focusing on in 2023?. What are you and your teams mainly focusing on in 2023?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

The planning cycle for investments is a 12-month process. And so we're now beginning to think about what will happen in 2024 with the need to also manage through and perfectly execute 2023.

I think about how supply chains have been primarily an efficient execution engine for the consumer for a long time, and it's becoming much more experience based. And so putting those investments at the front end of the supply chain, assuming that a lot of the underlying mechanics are built, but most importantly, is because we don't know what we don't know.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

How do you find mechanisms to create an agile process and workflows?

Karl Siebrecht, Co-founder & CEO, Flexe

Covid was arguably a silver lining. It was such a dramatic disruption. It put this spotlight on the need to make supply chains agile and start to really shift from a mentality of cost, cost, cost, risk reduction, risk reduction to growth. It's doing something brilliant and differentiated for consumers by turning it more into a growth lever than a cost lever.

I think it also started to shake us out of what was kind of a fantasyland of believing that we could predict the future. We just need to be really realistic about how much we can predict and what's the error around the forecast and in particular.

When we pay attention to time horizons, the longer the time horizon, the more likely it is that there's going to be a larger risk factor or larger error factor in your forecast. It just is what it is. So Covid I think, has helped more and more people understand the reality of our ability to forecast.

And I think that so now going to your question, will, how do we do that? I think one answer is to continue on this journey of digitization. Agility is really about the ability to make. Good decisions faster and in digital infrastructure when applied right or applied well can lead to that. There are other models in logistics and beyond logistics to sort of start to incorporate flexibility as an ongoing mechanism in your portfolio of infrastructure.

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