What if we end up creating a slump in consumer spending this holiday season simply by assuming there will be one? That’s the scenario envisioned by Paul Martyn, vice president of BravoSolution, a provider of software and services for supply management. If Martyn is right, a good number of consumer products companies are spinning a self-fulfilling prophecy.
Martyn cites the latest figures from the Report on Business of the Institute for Supply Management, showing a huge jump in order lead time among major product categories such as electronic components and appliances. The reason is an alarming drop in inventories, spurred no doubt by concerns over the stagnating economy.
In tough times, it makes a lot of sense to cut down on unneeded stocks, which burden the balance sheet and increase the likelihood of product obsolescence. The problem is that order demand has risen in 14 of the last 15 months – the same period during which inventories have steadily declined. As a result, lead times have soared from between 10 and 12 days to a whopping 53 days in ISM’s most recent monthly report. Anyone with a calendar can see that this impinges dangerously on the beginning of the Christmas rush. Says Martyn: “That’s a significant challenge to planners, when it comes to procurement and sourcing.”
And here we thought that inventories were on the rise again. What was all that stuff coming over on containerships from Asia earlier this year, causing carriers to boost rates, roll cargoes and even bring back some of the tonnage that they had mothballed during the depths of the recession? It wasn’t the result of a spike on consumer spending. There was some speculation that merchandisers and manufacturers were restocking depleted inventories, in anticipation of recovery. They didn’t want to be caught with empty shelves, when consumers started buying again.
Yet here’s Martyn, seeing only a “modest correction” of inventory levels in July and August, the traditional time for stocking up on Christmas merchandise. Is it because companies have embraced the doctrine of Lean supply chains? If so, Martyn thinks they’ve gone too far. “I would argue,” he says, “that folks are anorexic.”
There are three ways to respond to a surge in demand. If you’ve got the inventory, you ship it out. If you don’t, you fall back on the capacity to make it. Lacking that, you’re left with the time it takes to respond to new orders from scratch. Many companies appear to be relying on the last option, gambling that an increase in demand won’t materialize this year.
But what if eager buyers flock to stores during the Christmas season, only to keep their wallets closed because the desired merchandise isn’t on the shelves? For retailers, the result’s the same as if those customers hadn’t passed through their doors in the first place. “If the product is not on the market,” says Martyn, “that’s an order lost.”
Which brings us to the big question: will we see a big increase in consumer spending this coming holiday shopping season? (Or, at least, the desire to spend?) Obviously a good number of merchandisers believe the answer is no, especially in light of recent economic reports suggesting that we’re in a double-dip recession. If they’re right, suppliers are simply being realistic. “That absolutely could be the case,” admits Martyn.
Unless that brand of realism is really an irrational pessimism that will bring about the very thing retailers fear most: a sluggish Christmas. Because consumers, even if they do want to spend, won’t be satisfied by lead times of more than 50 days on items they can’t buy on the spot. (Or closer to 60, if certain powerful retailers cut the queue by paying extra to expedite their orders.) For harried, impulse-mad holiday shoppers, there’s no more dreaded word than “backorder.”
I wouldn’t want to be the CEO who has to roll the dice and decide whether or not to plan for the worst. If consumer demand bounces back, and you’re not ready for it, you become responsible for a huge amount of lost sales. Even worse, you could be blamed for contributing to the slump through your negativity. But if you pump up orders in anticipation of a recovery that doesn’t materialize, you’re left with unwanted inventory. Either way, your job could be on the line.
So what can you do to mitigate the risk? Martyn has a few ideas. He recalls the jet fuel-hedging strategy of Southwest Airlines, which protected itself against fuel-price hikes for a number of years. (Southwest and other airlines continue to pursue this practice, with varying results.) He expects to see more of this behavior by major companies. And he notes the recent decision of Texas Instruments to boost manufacturing capacity and buffer stocks in anticipation of renewed demand – an action, incidentally, that was punished by Wall Street in the form of a lower share price.
Martyn says consumer goods manufacturers should renegotiate contracts with suppliers, to reflect the high degree of uncertainty that is clouding the months ahead. Consider having two contracts in place, one assuming a double-dip recession and the other based on recovery. They would call for different rates, order sizes, lead times and guarantees. Actual demand signals, shared by the buyer and supplier, would determine which contract kicks in. The discipline of strategic sourcing optimization can be a big help in this regard, Martyn says.
Still, there’s no way to protect yourself completely against the consequences of your sourcing decisions. “You could be a hero,” says Martyn. “You could be the goat. But this is the time that you’ve got to make those decisions.”
Good luck with that.
Robert J. Bowman, SupplyChainBrain