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Chain of Uncertainty

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A Special Report Sponsored by




Life is more than a little unsettled for retail supply chain executives these days. Since the start of the year they’ve had to deal with rising commodity prices, oil prices that have sprinted past $100 a barrel, turmoil in the Middle East that impacts oil prices and poses a potential threat to transportation routes, and the earthquake and tsunami in Japan that is likely to impact the availability of electronic components and devices.

Several retailers interviewed for this supply chain and logistics special report expressed mounting frustration over a lack of control when it comes to issues negatively impacting the supply chain. Still, they remain focused on managing through the mayhem, factoring unrest into their planning and, in particular, doing whatever they can to offset rising fuel costs — their No. 1 concern.

With margins, sourcing and transportation costs under increasing pressure as a result of spiking oil prices, retailers across the country are considering changes and weighing various options. Some are considering conversion to slower modes of transit. Other talk of increased use of consolidation or multi-stop pickups. They are quick to concede that all of these solutions either add time or cost to the supply chain, yet the consensus is that they don’t expect to see fuel-price relief in the near future.

The director of import/ export operations and international trade compliance for a large home goods retailer says soaring fuel prices have already added “significant costs to both import ocean costs and to domestic drayage moves.” Looking ahead, the company hopes to negotiate more predictable and favorable fuel agreements with ocean and drayage carriers, perhaps even caps. “We realize that this may move costs out of fuel and into base rates, but we anticipate that it will at least make for more predictable rates over the length of the contract.”

‘No shortage of oil’
Making matters worse is what Al Ferrara, national director of the retail & consumer product practice at BDO USA, describes as an insidious multiplier effect. “Oil prices affect so many pieces across the supply chain — everything from producing goods to heating manufacturing facilities to trucking,” he says. “The increases we’ve seen of late could have a tenfold impact on the rest of the economy.”

Ira Kalish, director of global economics for Deloitte Research, offers retailers a ray of hope. He points out that there has been no shortage of oil; prices have risen so rapidly because of a “risk premium. People are worried about what might happen ... but right now there’s plenty of excess capacity in the global [petroleum] supply chain. The fear that the unrest we’re seeing in some parts of the Middle East could take place in other countries … is real — but so far that hasn’t happened.”

Assuming political unrest doesn’t spill over into other strategically important Middle East countries like Saudi Arabia, Kalish expects the price of oil to fall back a bit and stabilize. For now, however, he says increased fuel prices are a cost that retailers might have to absorb.

Rethinking sourcing initiatives

Tim Pyne, vice president, retail, consumer and food for Tompkins Associates, a global supply chain consulting firm based in Raleigh, N.C., has some recommendations to help retailers manage supply chain costs.

“First, they can measure the cube utilization of all inbound and outbound trailers,” he says. “Second, to increase cube utilization, they can implement transportation optimization processes and best practices initiatives.”

Volatility in the Middle East has not only impacted the price of oil; it has also prompted some retailers to rethink the movement of goods and some sourcing initiatives.

One sporting goods retailer reports that it has goods due to ship from Egypt later this year. If unrest in that country continues, “it may impact the flow of some product,” a company official says. Depending on the severity of lingering instability or uncertainty, sourcing would likely be shifted to another low-cost region.

The home goods retailer isn’t feeling any direct affects from the political upheaval in the Middle East. The company’s greatest concern at the moment centers on Italy, where freight forwarders are warning of price increases.

“We know that risks like these are always possible when one ships internationally,” the retailer notes. “The risks increase and decrease in waves over time” but the advantages of international sourcing are “tremendous and outweigh most risks.”

Other retailers concur. Most have not been directly affected, but remain vigilant should the unrest in the Middle East spread. In the interim, several say they’re monitoring how it may affect shipping lanes and are building business continuity strategies in the event that lanes are affected.

Shifting production

The Middle East isn’t the only part of the world retailers have their eyes on. The rising cost of materials, increases in wages and escalating transportation costs are prompting many to rethink their sourcing strategies. Kalish, for one, wouldn’t be surprised to see Mexico, Central America and the Caribbean become more favorable locations for sourcing given their proximity to the United States.

Moreover, he senses a general desire to unwind the dependence many U.S. companies have on China. “It’s more than just the potential for rising transport costs,” he says. “China’s wages are rising rapidly and China’s currency is likely to rise in value” relative to the dollar. As a result, a lot of businesses are awakening to the fact that “it’s not a good idea to have all your eggs in the Chinese basket.” Kalish expects some low-cost goods production is likely to shift to Vietnam, India and Indonesia.

While a handful of retailers say that, for the first time in years, they’re hearing buyers and production managers discuss domestic production, no one is talking in earnest about shifting manufacturing back to the United States.

“There just aren’t many manufacturing plants left,” Ferrara says. “So much of what once existed has dried up over the years. The idea seems to resurface whenever transportation costs start to climb, but … the time, effort and capital it would take to start again from scratch is more than most could bear.”

Improving visibility and insight

As if they don’t already have enough on their plates, security issues also loom large for retail logistics specialists. Some report continuing to solicit security-related information from supply chain partners and scheduling more frequent audits to meet regulatory requirements. In addition, retailers are seeking to develop tighter controls on how they qualify the partners they work with around the globe.

Given all of these factors, Pyne says now is the time for retailers to renew their focus on inventory reduction strategies and speed to market. “Developing a strong inventory business process is the key to reducing inventory levels and requires an intense focus on reducing the total lead time to get product on the shelf,” he says.

Indeed, retailers continue to look for ways to improve visibility and the insight it provides as product moves throughout the supply chain. In addition, an ever-growing number of supply chain executives are working to put systems in place that will allow them to deal with challenges related to the burgeoning mobile retail space. And all of this is happening against a backdrop of concern around environmental and sustainability issues. For more insight into these and other issues related to logistics and the global supply chain, read on.