Retailers Face Higher Cargo Costs, Late Deliveries

Discussion
Jul 28, 2010
George Anderson

By George Anderson

Retailers that benefited from trimming their inventories
during the Great Recession are finding an unexpected side effect from that
action has driven up the costs of getting goods shipped from overseas. It has
also moved delivery schedules from just-in-time to just hope we get it sometime.

According
to The New York Times, shipping companies took vessels out
of service as the demand for products diminished. The report cited AXS-Alphaliner
data showing more than 11 percent of the global shipping fleet being idled
in the spring of last year.

Carriers, according to the report, have also moved
to “slow steaming” in
an attempt to cut fuel costs. At the same time, demand from other countries
for goods has created a bidding war for deliveries. Companies today are paying
two to three times what they were last year to get goods to port.

“All my customers, they’re having a terrible time,” Steven
Horton, principal at Horton Global Strategies, a firm that negotiates freight
contracts, told the Times. “With the increased cost and them not
knowing if they’re even going to get the space or equipment, it’s
a weekly battle.”

A wide variety of manufacturers and retailers were
cited by the Times for
having issues obtaining product. The Container Stores, Cost Plus World Market,
and True Value Hardware were all identified as having products show up too
late for seasonal promotions.

To get products in on time, some companies are
turning to air delivery, which costs roughly 10 times more than shipping by
sea.

Jeff Turner, who is in charge of the supply chain and store operations
for Cost Plus, told the Times, “We have agreements that literally
say we don’t have peak-season surcharges for our business, but we’re
treading completely new ground. Our carriers are coming to us and saying, ‘If
you want to get on the vessels, we need to figure out how you guys pay peak-season
surcharges.'”

Discussion Questions: How big an issue is the current shipping situation for
U.S. retailers and their suppliers? What are the potential ramifications for
consumers? Does the current issue make the case for the benefits of manufacturing
closer to home?

[Editor’s Note] The National Retail Federation (NRF) and Hackett Associates
are projecting imported cargo volume to be up 16 percent this month compared
to July of last year. A statement by NRF said, “double-digit increases
seen in recent months should taper offer this fall as retailers cautiously
manage their inventories.”

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7 Comments on "Retailers Face Higher Cargo Costs, Late Deliveries"


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John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
10 years 9 months ago

Great topic that points to the value of manufacturing in the US or our land neighbors Mexico and Canada. Yes, the manufacturing costs less overseas (China), but the risks between factory and stores are much greater. Making items in the US, Mexico and Canada may cost more from a per unit basis, but when you take into consideration travel, time, fuel costs, delays, quality, perception and other risks, is the lower cost worth it?

I was speaking with an executive from a guitar manufacturer earlier this summer and explained that they need to analyze all the costs between Tree and Truck. The tree that they cut down to make the guitar all the way to the truck that the consumer places the finished product when taking it home. When you take into consideration all the costs including quality, availability, idle factories in the US that have fixed costs, manufacturing in the US starts to look a great deal more attractive.

Roy White
Guest
Roy White
10 years 9 months ago
Shipping cost increases and capacity decreases are a huge issue with the potential for big damage. Retail prices will likely be higher due to this. Availability of product in a timely fashion may be curtailed. There are many causes for this situation. Formerly, factories were concentrated in the South of China, but now they are all over that huge country, complicating logistics. The Chinese shippers, which experienced overcapacity, have now withdrawn capacity from the system to make it profitable. Slow steaming flows from the same situation. Product safety testing is, not surprisingly, a huge issue, and it costs at least $1,000 to test. Inspections are a major problem, since authorities are inspecting more and holding shipments more. It’s possible for containers to get stuck in San Diego or the Port of Vancouver for a week or two weeks. Storage costs are $200-300 daily, so this too can be a big cost driver. And, if a factory gets on a watch list, containers from there will be the subject of intense inspection. Even if just a… Read more »
Dan Raftery
Guest
10 years 9 months ago

Imported goods face a very real double whammy here–increased costs and longer lead times. It is already happening as the NY Times article points out. Peak season surcharges are being proposed for the fall that are 2x the spring PSS for some ports. Shippers lost a lot of money last year and can be expected to make it up now.

Retailers and importing suppliers have exacerbated the situation by trimming inventories to the bone. And many retailers are delaying order commitments, but not delivery expectations–shortening the PO to delivery cycle.

There is some credence to the scenario where anything more than a mild consumer rebound will cause painful supply gaps.

Paula Rosenblum
Guest
10 years 9 months ago

I have to say this report took me totally by surprise. As you point out, import volume is UP by 16%. Sales aren’t up that much. So I just don’t get it. Where’s the inventory problem?

I believe what the retailers are saying, but I can’t understand the math. I know there’s a shortage of containers (again…I don’t understand it, but I believe it) and I can kinda sorta accept that fleets took cargo ships out of service but still…imports are up 16% and sales are up, what? About 3%. How much inventory does everyone need?

I’m not being a wise guy here…I just don’t get it.

Susan Rider
Guest
Susan Rider
10 years 9 months ago

This is a huge issue for supply chains not in sync. Many have no visibility and demand planning is sorely lacking. Companies are investigating ways that will better manage this condition with a transportation management solution and freight audit software. Many have no one managing the vendors abroad, and trust that they are getting the best deals. With slow steaming, retailers may be forced to go with air freight which will increase cost greatly.

Of course this makes the case for manufacturing closer and many are investigating that trend and cost.

Ted Hurlbut
Guest
Ted Hurlbut
10 years 9 months ago

This is no small issue for retailers and wholesalers. With the Great Recession, economies of scale in both shipping and manufacturing are unwinding.

In the short term, there’s little that retailers or wholesalers can do that won’t impact margins. Both manufacturing and shipping capacity has been rationalized to align supply with demand. Costs are rising, and it will take a season or two for retailers and wholesalers to develop more economical strategies to source and deliver product.

The more serious issue right now is getting timely delivery of seasonal goods. It may be that airing goods may be the only option which will only further erode margins. Retailers and wholesalers may further scale back orders to minimize air freight charges, further tighten retail supply, and protect retail prices and margins. In this environment, especially for independent retailers, until sustained revenue growth returns the name of the game remains the bottom line, not necessarily the top line.

Carol Spieckerman
Guest
10 years 9 months ago

Freight log jams have happened in the past and, while they feel catastrophic at the time and there is always a lot of buzz about price increases, things tend to settle down and become a distant memory quickly.

I do have a couple of clients that are being hit hard by this because they have major programs setting; however, retailers are being pretty understanding because they are facing the same issues. “I feel your pain” is the upside of private brands!

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