Bryan Most: [00:00:00] You are now listening to the supply chain secrets podcast with Brian Moses and Don Davis. Well, hi everybody. I'm Brian, most SVP of retail strategy at and former VP of supply chain at Walmart.
[00:00:17] Don Davis: [00:00:17] And hi, my name is Don Davis. I'm the senior vice president of carrier strategy or at night shacks and former executive of have five Lloyd and CMACGM
[00:00:25] Bryan Most: [00:00:25] and we're back again for the next installment of supply chain secrets.
[00:00:29] Today's topic is your supply chain. Executive has just asked you for your 20, 21 ocean contract strategy. Now, what are not, I guess, in your case, it'd be your ocean carrier. Executive has just asked you for your capacity and revenue now. So Don, there's a really interesting article that came out this morning from the LA times that I think absolutely frames and sets this discussion.
[00:00:53] So I'm going to read a couple of quotes from it and then let's kick off the discussion. [00:01:00] So the first quote is from the chief executive Andrew Reese from Crocs. And he says, I don't think we're meeting everyone's expectations today. And frankly, we're unlikely to, I doubt if anybody else, either, if they're importing products from Asia, he said that on their earnings call this week, the second one is from Nautilus, Inc.
[00:01:21] Whose products include both flex fitness machines. They said on their call, that logistics issues delayed the launch of some of their new connected treadmills. Shoemaker Wolverine Worldwide said 20 million in sales would shift from the first quarter to the second because of logistics backlogs. And finally Steve Madden said, supply chain disruptions have cut the footwear company's first quarter sales projections by $30 million.
[00:01:50] So those are some pretty big numbers. I think absolutely frames how important these discussions are going to be when we're talking about what our strategy is going to be for the upcoming year.
[00:02:00] [00:02:00] Don Davis: [00:02:00] Yeah, absolutely. And I think it's it's indication that there's pretty significant backlog. I think there's different reasons for that.
[00:02:08]And I think it's also an indication that things aren't going to change quickly, right. That we've been seeing this going on for a
[00:02:15] Bryan Most: [00:02:15] sustained period.
[00:02:16] Don Davis: [00:02:16] And let's just say for a second things open up and, and things get better. Overnight, I still think there's a lag between what's been ordered, what's moving in transit.
[00:02:28] And when that stuff's actually going to get on the shelf for someone to buy.
[00:02:33] Bryan Most: [00:02:33] Yeah, no, no question. And so these discussions, these plans that you're putting in place that you're going to share with your internal stakeholders, again, are going to be more important than ever. It's your chance to create education and awareness to what's happening.
[00:02:48] I think, at a high level, you think about, first and foremost volume, the forecast that we're out initially, how did you actually come in versus some of those numbers? Were there [00:03:00] any anomalies from a lane perspective or seasonality? I'm sure there were, when you think about COVID impacts and things that you had to deal with this past year, certainly there's a financial component in terms of your budget, obviously there was some, some sort of budget that that was expected and a lot of cases based on what I've heard, Don, that those were exceeded because of the things that people had to go through to, to keep freight moving.
[00:03:27] And then how did you carry your partners perform? What did, what did things look like in terms of what you contracted for what you'd actually got? And then of course, there's the service metrics that go along with it. When you talk about booking acceptance, roll percentage, departures arrivals, I think you've got to start there to figure out how did things go?
[00:03:46] Where were my opportunities? And then you can start to dive into the root cause and figure out what solutions might be. And
[00:03:53] Don Davis: [00:03:53] Brian, when you do that process and you're thinking about this question, to what extent are you thinking about new [00:04:00] options? Like people you haven't used before? Is it, is it something where it's like, Hey, I got to try something new and use somebody else, or do you say like, Hey, I'm going to go with mine commons first, give them the benefit of the doubt and say it's been a tough year.
[00:04:13] So I
[00:04:14] Bryan Most: [00:04:14] believe that they can fix it. Yeah. I think that's part of the process. I think some throughout the year, Probably added new carriers, in the third and fourth quarter or added NVOs. And I would certainly look to see how they perform. Did they perform any better than my primary or incumbent carriers?
[00:04:31] And if so, why? But ultimately, yeah, it comes back to that discussion around how did people perform and then. Why didn't they perform? If it has to do with capacity commitments, if it has to do with premium offerings, what have you, somewhere there was a gap where there was non-performance and so that's where I'm going to focus.
[00:04:51] And if my numbers didn't turn out the way that I had hoped they did. I'm not sure that I can go back into my carrier [00:05:00] executive and say, I'm going to do exactly what I did last year. I'm not sure that's going to fly. So I think that's where I have to look at those opportunities to say, if I'm going to add new partners, it's gotta be something different and unique than what I had previously.
[00:05:14] Otherwise I'm not sure anything would change.
[00:05:17] Don Davis: [00:05:17] And do you think that. Service commitments become more important to you. So you might be a little less price sensitive, not saying what your price sensitivity was before what's happened. Does that change your perspective on price sensitivity? And you start to look more towards maybe reliability, commitment, and service.
[00:05:37] Bryan Most: [00:05:37] I think every shipper has to determine what their goals and priorities are from the very beginning. Does it start with. Having the lowest possible cost and rolling the dice as to what gets on the ship or doesn't, or is it some type of blend between I want a fair price, but I also want to ensure there's service and predictability and in my [00:06:00] approach has always been balanced across my career.
[00:06:02] And I think that's worked well. There's no point in having the absolute lowest contract rate that won't move, move any freight. Right. So you've got to find that balance. And I think you can do that, but I also think there's clarity with expectations from your carrier partners that says, look, if I'm willing to pay a fair rate, here's what I expect in return from a service commitment standpoint.
[00:06:25] And I think you you've heard a lot of carrier executives talk about this that say, Hey, look, we want to get to the point where we can provide you the service you expect. Now, obviously there's a cost that comes with that we have to be profitable to do so. But I think there's gotta be a balanced approach.
[00:06:42] And if I'm a shipper, that's part of my messaging to my internal stakeholders to say, if we want to resolve the issues and the delays and we want to improve or in stock, and we want to take advantage of more sales opportunities. I think there has to be some investment that's going to be made. [00:07:00] In price to get that predictability.
[00:07:02] And I don't like the whole idea of saying, well, I'm just going to pay a premium to pay a premium. To me, it's an investment. I'm going to invest in price and I better get a return when it comes to service
[00:07:13] Don Davis: [00:07:13] reliability. I think you're you're right. I think that rates are first of all important factor for the carriers because that's a measuring stick to judge how people are accepting service levels.
[00:07:27] If, if there's. Continues or customer continues to put pressure on rates. I think that's a signal to say that I'm more price sensitive than I am service sensitive. And that there's a requirement for me to have a lower rate and for whatever, whatever those factors may be, whatever we're not judging.
[00:07:47] But I think that type of signaling to say, like, I'm not really I don't use services important and it's, it's about the almighty dollar. I think what you saw last year is that there was quite a bit of rate evolution that it was [00:08:00] harder to get a container and harder to get space in the ship. So I don't know that that's the right philosophy, but
[00:08:06] Bryan Most: [00:08:06] certainly
[00:08:06] Don Davis: [00:08:06] it's, people's prerogative and there's some people that would argue that they think what's happening now is a short term phenomenon.
[00:08:14] And it's all COVID related. I wouldn't argue
[00:08:17] Bryan Most: [00:08:17] that. I think
[00:08:17] Don Davis: [00:08:17] that we're in for a sustained period of re a fundamental change in how rates are. Price on the dress civic trade.
[00:08:27] Bryan Most: [00:08:27] Let me pick up on that because I think that's the second component, right? There's the internal review that you do on your own.
[00:08:32] But I also think that there's an education process that has to take place on the retailer side of the market environment. Look, you're, you're, you're senior executive. He may have read a few hot headlines and, and he may know some things from your updates that you've given him, but you've really got to take the time.
[00:08:49] I think, to share what this market environment is both short and longterm. Just so they get a sense for what the company's going to have to deal with and then how your [00:09:00] plan is going to accommodate or allow the company. To operate both short and long-term and I think there's components of supply and demand.
[00:09:08] I think you obviously have to address the port congestion, but I think to your point, Don, there's an aspect where you've got to lay out this story around a structural change. You know, the industry consolidation that's happened that we've talked about before the limited order book and just, you know, carriers needing to get to a point of profitability.
[00:09:28] To invest in future technology and to decarbonize and all those things w w we know are important. So I think that's a really important part of the story that, that a retailer needs to tell and educate as part of this process.
[00:09:41] Don Davis: [00:09:41] Yeah. And so I think that the order book is something important to talk about because the order book was always a factor that was this excess supply was, was driving down the rate and.
[00:09:54] You don't see the same type of behavior from the carriers. And that's largely due to the IMO [00:10:00] saying we're going to decarbonize the industry. There are certain standards we're expecting. So if you're a carrier you're a little bit stuck, right? Like if this is going to happen over the next 10 or 15 years, well, that's my average ship lifespan.
[00:10:13] So how am I going to buy ships that I know I have to replace where I'm not going to get the full benefit of that. So I think that's something that is. Causing some pause in the carriers in their order book. But let me talk a little bit about that question you would ask at the beginning of, if, if I'm in trade, my boss has said, Hey, what's your plan.
[00:10:32] And if I'm a trade manager right now, there's two things I want to do. I want to make sure the ship's full. And I want to make sure that there isn't much rate of erosion because I'm happy with the current rate levels. And that allows me in my company to do certain things. Now, I think that carriers are going to think about BCO and NVO split.
[00:10:52] I mean, normally you're going to partition the ship in a certain way, but I think it starts with the overall capacity. [00:11:00] And how much contract, how much are you going to tie up in contract MQCs? And if it were me, I would say. Something like 80-85% of the available capacity I would be tying up in MQC I'd want a little bit of buffer or some of those value added services, because I think carriers successfully implemented those this year.
[00:11:23]But then that also gives me some room for a buffer when there's a surge. So in peak season or what such so on, I have the ability to Accommodate additional volumes again, good BPSs or what have you. But I think it starts there. You're looking at like 80-85% through MTC. And then below that you're going to maybe say 60% BCO, 40% NVO.
[00:11:47] But even within that NVO split, I think what's important to the carriers is the fixed versus floating that the NVOs are going to bring some named accounts. But the nice thing about NVOs is one. They can shift a [00:12:00] different location. So maybe I have an imbalanced somewhere that I can, I can, it can help fulfill a need, but two that they provide FAK.
[00:12:08] And that FAK in the recent past has been pretty lucrative and the carriers usually want to play in that spot. So that's hot space and the allow them to do that. So they're going to leave some space available and I would guess that would be somewhere like 70% knack, 30% FAK, because different NVOs have different abilities to provide FAK cargo.
[00:12:31] I think that's been increasing by the way, but just to throw out some numbers, that would be my sense of
[00:12:36] Bryan Most: [00:12:36] how to approach it. I think it's important to, to share with others, right? Because they might not understand that that breakdown or how a trade manager might look at it. And then as a BCO, you have to think about.
[00:12:49] Okay. I only have this percentage available to me to go after. So we've heard a lot of discussions around. I might have to think about contracting earlier this year or [00:13:00] starting my discussions with carriers earlier than I have before. And again, as part of your plan that you communicate to your senior executive, you might have to adjust your timeline this year.
[00:13:10] If you haven't started having those discussions yet for your may, one agreements you may want to start. And so. Just knowing that the market is certainly continuing to be strong, that carriers only have a percentage of their shifts are going to allocate to long-term contracts or viscose, or you've got to really put yourself in a position to be able to take advantage of that capacity while it's available.
[00:13:33] Don Davis: [00:13:33] Yeah. And, and my impression from talking to carriers is that they want to do a better job of this, this year that they're aware of what's happened. They are aware that it's been difficult to fulfill the commitments for customers for a variety of reasons. Some of those could be self-inflicted. Some of those are market-driven, but.
[00:13:53] Regardless of the reason carriers are definitely thinking about how I can do a better job because there's a cost for them too. Right. And, [00:14:00] and I do believe they want to provide a level of service that customers can rely on. And so my sense is carriers are much more organized in their approach this year in terms of contracting.
[00:14:11] Well,
[00:14:11] Bryan Most: [00:14:11] I'm sure the shippers will be happy to hear that that's the case because they probably haven't felt like that's the case because they probably feel like they've paid higher rates than they ever have before. And the service has been probably as worse as it's ever been. At least that's what some of the statistics would tell us.
[00:14:28] But just knowing that from a carrier perspective that they do have at least a sense of urgency or want to improve this, I think is great. And I think you hear the same thing on the shipper side, where shippers are saying, I know it's important to improve my forecasting, to plan better with carriers, to create opera opportunities for collaboration.
[00:14:49] So it seems like both sides have expressed the need to get out of what we call this again, crazy or vicious cycle. It's just going to be how does that play itself [00:15:00] out? But at least I think the market dynamics have pushed everyone to the point of saying, we can't go on. Like we have.
[00:15:07] Don Davis: [00:15:07] Right. And I think for carriers, it's not easy because they can't control everything.
[00:15:12]They control equipment supply. To some extent they can control portal missions and, and trying to avoid congestion. But I mean, the situation in LA, I mean, you're kind of stuck right there. There's not much you can do. There's 30 ships out there at anchor. You can't just hop in front of somebody else.
[00:15:28] It's a very difficult situation. So there's, there's things, carriers can't control. And I believe they're trying to fix that, but I think one has to understand too, that they can't control everything and there could be other factors which make it
[00:15:41] Bryan Most: [00:15:41] difficult for the very near future. Yeah. And I think that's a key point certainly is for shippers around you, same thing.
[00:15:50] You have to control what you can control, right? This plan would have to incorporate again, everything that you learned from last year, whatever the market looks like, and then obviously [00:16:00] your solutions for going forward. And a portion of that is going to be what you can control. Your example of LA is a perfect, the one that has been brought up a number of times in articles, and on webinars.
[00:16:10] Around this diversification and redundancy component that has to be part of plans this year. If they haven't been before this idea of saying, I need to have probably participation across at least two out of the three main alliances. I'm going to have to backup carriers in my critical lanes that, that maybe I haven't had before this idea of saying I have multiple kind of import gateways to keep freight flowing.
[00:16:36] I mean, a great example is one of our customers we talked to that has the majority of their cargo. That goes to an inland point in the Midwest to say right now a hundred percent of that gets on a, on a train in LA. And right now they are absolutely stuck. And so the idea of saying maybe there's a portion of that, that they want to work with carriers on services through the Pacific Northwest or through Vancouver [00:17:00] or all the way up in Prince Rupert, but just this idea of creating options for yourself that should there be any kind of disruption in the supply chain, you still have a chance to move freight.
[00:17:11]Those are things that are going to be really important this year that I think any super's going to have to incorporate as part of their plan.
[00:17:17] Don Davis: [00:17:17] Yeah. And I think it's interesting because I think about last year and last year, all the talk was, well, I think I have to move out of China. I have to start thinking about Southeast Asia as a sourcing strategy because of these tariffs and China and, and you know, the other big thing was the IMO and with new fuel, low solver requirements.
[00:17:37] And here we are year later. And those are such a thing of the past. Right now, we're talking about US infrastructure, trying to get through certain issues and certain boards. And how do I manage your supply chain? I think it's been tough for supply chain managers. I don't any envy anybody in that position this
[00:17:54] Bryan Most: [00:17:54] year.
[00:17:55] Yeah, but it's a process we've talked about this before. I'm not sure you [00:18:00] can attack everything all in one, one contract cycle. This is again where priority becomes really important. You need to focus on of these alternatives. What is going to make the biggest impact to your supply chain. What's going to help put your position your company in a position to be a competitive advantage.
[00:18:18] You'd love for the supply chain to instead be looking at, you know, the cause of all of these issues and disruptions to actually be a competitive advantage to say. My expectation is, is that disruption is going to continue probably for the balance of 2021. We thought, well, maybe it's going to clear up after Chinese new year, then you heard, well, maybe after the first quarter, then it was first half and now most of the articles are saying, Hey, look, we're probably just going to settle into this for the majority of the year.
[00:18:46] Now, whether that remains to be true, I don't know. But I think as a supply chain manager, you've got to plan for the worst and expect that that would be the case. So this idea of saying there are going to be two or three key [00:19:00] strategies that I'm going to try and implement and deploy. And then after that, it may be, it's more of a multi-year strategy, but I think that gives your your senior executive at least a chance to have confidence that you have things that you're going to do this year, that will make a difference.
[00:19:15] And then you also have a plan to further execute in future years. Should this structural change in the marketplace that we think is happening truly does happen.
[00:19:24] Don Davis: [00:19:24] Yeah. And so I'd be interested in your views on this, Brian, because we talked earlier about those articles and how there's been disruptions to the supply chain.
[00:19:32] And this had affects for several retailers. And I think about the traditional peak season, right in July. It usually July, August is when there's the traditional peak season. Do you still see that, that there would still be a peak season on top of what we're already seeing? Or do you think that some of these this, the steady flow of, of demand that we've been seeing for some time, do you think that's gonna.
[00:19:59] Gonna start to [00:20:00] soften and that would be then replaced by any surge for Christmas goods.
[00:20:04] Bryan Most: [00:20:04] Yeah, I think, I think the steady demand continues again. I think it's great that we're seeing COVID cases, plateau and trend down, but we still have a long way to go on vaccinations. I still think we have a long way to go for larger gatherings and families jumping on planes and going on trips.
[00:20:22] So I think the first half, I think you still see a lot of that sustained volume and then the back half of the year we'll, we'll have to see, but I still think that a lot of peak volume is driven around seasonal demand and holiday and Thanksgiving and Christmas are still going to be there. So I think you'll still see some degree of peak that will come on top of what the sustained demand is.
[00:20:45] But between now July, August, I don't really see anything slowing down.
[00:20:51] Don Davis: [00:20:51] Yeah, I, I I'm hearing the same, I mean, at least from a carrier forecast perspective, but I think carriers have had a history of not really getting great [00:21:00] forecast. So it's a little hard to, to bank on, on what they're seeing.
[00:21:04] Bryan Most: [00:21:04] Yeah. Yeah.
[00:21:05] Well, I think that what, when. You're you're thinking about this. I think without a doubt, you've got to do your, you know, your 2020 year in review as, as difficult as it is and figure out what, what you can learn, educate from a market perspective and then plan that has some redundancy in some key priorities that you can move forward within this contract year.
[00:21:27] And then again, it's, it's like, don't leave anything to chance that you can, this idea of just being simple and clear and making your expectations known. Actually documenting it. Right. You know, so you can measure performance against it and create this mutual accountability, Don, that I think you and I both subscribe to, and we know what we measure, right.
[00:21:49] Typically tends to improve from a performance perspective, but there's simple things like that, that you just can't overlook. And so I would just encourage those to say, [00:22:00] Hey, maybe there were some things that were either ambiguous or gray in the past. I'm going to make sure that that doesn't happen again.
[00:22:08] I'm going to be very clear and explicit and there's gotta be some, some kind of accountability to ensure that it happens the way it's supposed to.
[00:22:16] Don Davis: [00:22:16] Yeah. I mean, I think that our industry is changing. I think a lot of thought processes are changing and I think there's a lot of looking at the contracting process to say, is this really the right way to do it?
[00:22:29] Where really neither party knows what's going to happen? I mean, I think there's some expectations, but, and they're the way that they're defined so broadly, it's, it's hard for either party to be really clear on what's going to happen. And, and I talk about this a lot at carriers as asset based companies.
[00:22:47] Their ships can't grow and shrink very easily. They don't impact their container. Inventory is, is what it is that their containers are in certain places. It's very difficult and hard to get them back for a [00:23:00] variety of reasons, whether it's moving via rail, whether it's that, whether it's Congestion at ports, what have you, free time customers not returning them, et cetera.
[00:23:12] So it's very difficult for them to be, to be nimble. And I think the more that they can plan and plan with certainty to say, I know this is going to happen. I know I'm going to have 10,000 extra containers in Dallas. Helps them plan things better than just doing it with a lag and saying, Oh my God, no, I have 10,000 containers in Dallas.
[00:23:33] If they can plan ahead, they can respond more quickly. And in the end provide a better service.
[00:23:38] Bryan Most: [00:23:38] Yeah. And I think that's what makes this, this industry and these jobs so complex because it's the same for the shipper, the shipper, can't essentially manage consumer demand. I mean, people come and shop and they buy things when, when they want to, and now they have.
[00:23:52] All the options to do it whenever and however they want with and things of that nature. But to your point, there is a core part of [00:24:00] your business that you could probably count on. That's more of that replenishable weekend week out, that that's where you focus your efforts to say, that's where I can work with the carrier to create some predictability.
[00:24:11] And I feel really good about it. And then maybe I'll have options for how I deal with, with overflow or surges that you just can't see. Or predict, but I think it's really smart to your point to look at it that way and then work together where that can, can take place because that's where the collaboration and the planning I think will, will really pay off.
[00:24:31] Don Davis: [00:24:31] Yeah. I mean, I, I get excited for this industry when I think about more predictability and more sustainable rate levels. I think that that really opens the door for this industry to really go to a different level than it's been. Again, people talk about this industry, it's in the stone age, very slow to evolve old rules that, you know, Hey Bisbee and things like that that have been around a long time.
[00:24:54] And I think it starts to propel the industry forward. Now that you have some predictability and some, some ability to [00:25:00] invest in yourself really can change how things work from there today. And I'm excited to think about a year from now what we're going to be talking about.
[00:25:08] Bryan Most: [00:25:08] Yeah, I think that the last point I would make from a shipper perspective, again, being there for a number of years.
[00:25:14] That's to really, truly make these, these impacts, right? It takes resources and it takes support from internal stakeholders. So I would just be clear and explicit as part of your plan, what the resources are that you need. And I know budgets are tight, but maybe there's a ways to use technology to help you scale or to be able to better manage your supply chain.
[00:25:35] Obviously, if there's there's people, assets or third-party relationships that can help you. Through that process. I think that's important to be able to, outline. And then the last point, it just takes a lot of key internal stakeholders to make these things happen. So educating and making aware the procurement teams and replenishment groups or sourcing.
[00:25:57] That's going to help you be successful. And a lot of [00:26:00] times, obviously they're burdened with their own challenges, but you've got to somehow tie their support of you into the overall picture of success. And if they're helping you create. Orders earlier, that creates a better forecast that you can share with carrier that allows you to get capacity and pricing that's beneficial.
[00:26:20] That helps everyone, and it really takes all those groups. So take the time, make the effort and put it in terms that they can understand and ultimately creates return or benefit for the whole group.
[00:26:33] Don Davis: [00:26:33] Yeah. I think those are great words, Brian, and I think that makes a lot of sense and, and I'm hopeful that that things will start to change and, and, and the more customers can do that.
[00:26:41] I think the better off this industry. Awesome. Well, I think that's, that's a wrap for this episode. What, what are we, what are we doing for next week? We're going again, right. I hope
[00:26:52] Bryan Most: [00:26:52] so. We'll see what we'll see what the topic that comes back again. We'd love to hear from, from any listeners on what they they'd like to hear [00:27:00] us talk about, but I'm sure there'll be something else in the headlines.
[00:27:03] There is every day for us to to talk about,
[00:27:06] Don Davis: [00:27:06] and I'd like to give a special thanks to the man behind the curtain. Scott Gelber is our producer of this show and does a great job. So, so thanks for everything happened and you don't get to hear him too often on this show, but he's, he's doing a great job and he's, he's keeping us in line.
[00:27:19] Absolutely. Great. Well, that's a wrap. So we'll talk to everybody next week.
[00:27:28] Bryan Most: [00:27:28] Thanks for listening to the supply chain secrets podcast. Make sure to subscribe to the podcast on your favorite podcast
[00:27:34] Don Davis: [00:27:34] network.