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SOI 2021: Supply Chain Remains Source of Frustration

A perfect storm of challenges is causing inventory shortages, price increases and lengthening fulfilment times.

Jeffrey Nanus doesn’t sugarcoat the situation.“The supply chain challenges our industry is facing are worse than at any point in my 29-year tenure,” says Nanus, who’s president/CEO of Norwood, NJ-based AAA Innovations (asi/30023).

Promo suppliers of all sizes share a similar perspective. They detail a perfect storm of supply chain issues that are triggering industry-wide inventory shortfalls, driving up prices on products and slowing order fulfilment.

Among suppliers, the challenges are nearly universal. Over 90% say they’re concerned about supply chain disruption; 30% are extremely concerned. “The disruptions have touched almost every part of the supply chain,” says David Nicholson, vice chairman of Polyconcept, the parent company of Top 40 supplier Polyconcept North America (PCNA; asi/78897).

The issues are rooted in COVID-19. When the pandemic and its related societal shutdowns struck North America in March 2020, they bulldozed business across industries, including promo. That led to a severe reduction in importing by Western companies.

Shortage Story

Though rising prices are certainly on distributors’ radar, product shortage has been the greater concern. Neither is a promising development.

__have become a growing issue over the past six months.

89%

Percentage of suppliers who say it will be challenging to set prices due to supply chain disruptions.

But as 2020 progressed, demand bounced back – more abruptly and broadly than anticipated. “The sudden curtailing of new purchases last year followed by the rapid rebound in demand late in 2020 into 2021 has left the supply chain upended,” explains Nicholson. “It can’t catch up quickly enough.”

A top issue is that it’s taking longer to get promo products from overseas factories where they’re produced – mainly in China and other Asian nations – to North America. Massive demand across industries has caused a shortage in shipping containers and space on ships used to move ocean cargo. Air transport has been much harder to come by, too.

When suppliers can secure transport space, they’re paying exponentially more for it. “Ocean cargo costs have increased three to five times over,” says Nanus, noting transit time has lengthened from 30-35 days to 45-65 days.

Further up the supply chain, material shortages are causing consternation. For instance, a dearth of components and chips used inside technology products – an issue across industries – has been especially critical. Prices on certain raw materials, including stainless steel, aluminum, cotton and plastic have risen too. Suppliers are working hard to secure materials and paying the heightened costs. Nonetheless, getting the goods manufactured is taking longer and, in cases, becoming more expensive – repercussions tied partially to limited factory capacity and overseas production staffing issues.

“COVID and weather-related events have caused the capacity issue, and less capacity equates to less-than-expected production, contributing to inventory issues,” says Brian Sharkey, director of supply chain-trade at Top 40 supplier alphabroder (asi/34063).

The troubles don’t end when the products arrive in North America. Port congestion – again, a result of factors like the importing crush and COVID fallout – has led to delays in getting containers off ships. Once unloaded, there are further delays, owing in part to not enough trucking/train capacity to keep up, suppliers report.

David Nickolson “The disruptions have touched almost every part of the supply chain.” David Nicholson, Polyconcept

That all translates to delays in inventory replenishment. Furthermore, some suppliers say, the product assortment that does arrive is less diverse and more uneven than before COVID. “Vendors are focusing more on the primary driving SKUs and less on the secondary and tertiary SKUs,” says Sharkey. “Unfortunately, less focus on the lower-volume SKUs drives our overall inventory holes.”

Forecasting – which involves getting the right product assortment at the right levels – has become extremely difficult due to the marketplace fluctuations due to COVID. “We always try to take a very bullish approach to inventory levels, but frankly we’ve been in an environment where demand has been exceptionally hard to forecast,” says Jeremy Lott, CEO/president of SanMar (asi/84863), promo’s largest supplier.

Another domestic issue complicating matters for suppliers is staffing. As the promo marketplace recovers, suppliers need to hire more workers for their production/warehouse operations, but they’ve been having a hard time finding help. “The economy is recovering and we’re competing with other industries that are aggressively hiring,” says Nicholson. “This is leading to capacity challenges in fulfilling orders and will ultimately result in higher labor costs across the U.S. economy.”

Too Late

Even though rush orders fell during the pandemic, there was a rise in the percentage of orders that did not arrive on time, owing to supply chain disruption and staffing issues at supplier companies.

Percentage of Orders Requiring Five-Day Turnaround or Less

Percentage of Late Order Arrivals

Adding to the strain on order fulfilment is that overstressed domestic carriers have struggled to deliver on time, so even after a supplier has produced an order and placed it with a carrier, the time it may take for the branded merchandise to reach its destination has become protracted. Says Nicholson: “The result of all of the supply chain problems has been inventory shortages, higher costs for products, longer lead times for replenishment of inventory and order delays.”

Distributors Feeling the Impact

Suppliers Counselor spoke with say they’re doing their best to absorb the increasing costs of product production, transport and labor, but it’s simply impossible to remain viable as a business without passing along some of the expense to distributors – and thereby end-buyers.

In spring of 2021, PCNA increased prices an average of 4% – far below the increase in PCNA’s underlying costs, says Nicholson. Sharkey notes that alphabroder has made “price adjustments.” Says Nanus: “Virtually all product has seen price increases. The larger the item, the larger the increase.” Accordingly, an ASI Research survey found that over 90% of distributors agree that apparel and hard-good prices have noticeably increased in the last six months.

Meanwhile, the inventory and order delivery challenges are also causing headaches for distributors, forcing them to adapt.

Maggie Wright, director of sales and marketing at Alabama-based distributor City Paper Company (asi/162267), explains: “Stock presents a problem when customers ask for more specific items that don’t have inventory. Our team has had to be extra cautious in presenting product to verify inventory beforehand and it has resulted in alternative product pitches based on low inventory. Logistics is another concern. The in-hands date on every order needs to be cushioned to ensure the date can be met.”

Proactive suppliers are doing their best to mitigate issues. AAA Innovations, for instance, is ordering more inventory than is needed, farther in advance than normal, to beef up stock. It’s also increasing warehouse space to accommodate the heavier inventory load. Other suppliers are taking similar steps. Still, most expect the going to remain tough when it comes to the supply chain for the duration of 2021 and, according to some, through the first couple quarters of 2022.

Despite all the challenges, suppliers have a fundamentally positive message: The situation is manageable, and promo can navigate it. “Probably the greatest thing about our industry is its resourcefulness,” Nanus says. “Nothing will stop our industry from a really nice recovery.”