Associate Client Partner, Solution Architect
This Week in Leadership
$80 a Barrel. Now What?
Switch suppliers? Eat the cost? Or shut down some operations? With energy costs soaring, leaders face some unappealing options.
Say you must ship goods. You reach out to shipping companies for transport estimates. They respond slowly, with eyebrow-raising quotes—fourfold their 2019 rates. Also, their ships will arrive in port two weeks later than your timeline allows. If you’re lucky.
This is the scenario that’s torturing supply chain executives around the world, as the global shipping industry is mired in a logjam just as consumer products are due in at stores for the holiday season. Ports are backed up: in Los Angeles, for example, more than 60 ships holding tens of thousands of containers are currently anchored offshore, unable to offload, facing delays as long as three weeks.
It’s hard to understate the problem. Nike, for instance, says its products, which normally take 40 days to travel from Asia to North America, are now taking 80 days. Meanwhile, the retail giant Costco has chartered its own boats to try to allieviate the problem, but even with that measure the company reports that its shipping prices are up as much as six fold.
Experts say much of the trouble links to the six shipping companies that own 75% of all ship space and are all overbooked for the foreseeable future.. “There’s just not enough containers available in the world today to move the products that consumers are buying,” says Tom Wrobleski, coleader of supply chain talent optimization at Korn Ferry. Six months ago, flying seemed like a temporary solution, but most firms have discarded it. “That’s just too doggoned expensive,” Wrobleski says.
The shipping mayhem dates back before the pandemic, when many companies set up hyper-cheap international supply chains (often from Asia) and the shipping industry consolidated. The system grew uber-efficient. “The whole supply chain was about efficiency and cost, cost, cost,” says Dustin Ogden, senior client partner in Korn Ferry’s Global Industrial practice. “But a jolt makes an efficient system unable to absorb it. It can’t quickly pivot.”
This has created a perfect storm. While shipping space dwindles, pent-up customer demand is raging across industries, which has spiked faster than anyone expected, says Wrobleski. At the same time, he says, companies face COVID-related labor constraints, factory shutdowns, and international freight restrictions. The rise of e-commerce has also complicated supply chains immensely; rather than a hairbrush company shipping two containers of hairbrushes to a box store warehouse in New Jersey, customers now expect to receive one hairbrush, a laptop computer, and some deodorant in a single box on their doorstep.
In short: it’s a shipping cluster jam, and desperate times call for desperate measures. “Necessity may call for forging new alliances,” says Ogden. Think partnering with competitors or with businesses that operate similar supply chains. For example, a paper company and a toy company might share manufacturing cities, leading to efficient sharing of container space. He notes that competitor alliances are more common in Europe.
Further solutions involve overhauls. The key, says Wrobleski, is not relocating manufacturers nearby, but arranging suppliers, producers, and manufacturers in multiple regions that can handle major disruptions. “That’s the new drum beat. It has to happen,” he says. Backup chains are also essential, including warehouses and manufacturing with the flexibility to handle contingencies. Designing these plans requires executives who can think outside the box. “In many cases, they don’t,” Wrobleski says.
The other part of the success equation is customer relations amid transport slowdowns. “The best thing that clients can do is be open and honest with customers about when to expect delivery,” says Ken Merritt, a Korn Ferry senior client partner in organization strategy. Communicate if product delivery has jumped from four to 12 weeks—and don’t try to deliver in eight weeks and run late, he says. “You don’t want to overpromise and underdeliver.”
Counterintuitively, supply chain problems can also be savvily used to dazzle customers. “Give your customers a disappointingly long lead time, and then surprise them,” suggests Ken Bloom, senior client partner for Korn Ferry’s Global Infrastructure Construction and Services practice. He says that customers will be thrilled when a product appears early. He also advises overcommunicating. “Don’t leave them blank for seven weeks,” he says, so that customers know what is happening and feel important.