A true story: How the supply chain crisis shook a successful retail company in 2021

The following story shares the experience of a German based consumer goods company (name anonymized) which having experienced strong and sustained growth in recent years found itself in a full-blown crisis towards the end of 2021 – for the most part as a result of the upheavals experienced the world over as organisations of all shapes and sizes did battle with multiple supply chain challenges.

It is a tale of misjudgments about market developments, coupled with the blind faith that “everything will be OK in the end”.

It is very easy to say that the outcome is simply about management errors, and in retrospect, it is also very easy to say that the company decision makers should have taken a different path and decided on a different set of actions. It is almost certainly the case however that the company's management made decisions based on years of experience and experience from the past .

In my opinion, the decision makers took a course of action based on what they had available at the time and no misconduct can be deduced from this.

Rewinding to the end of 2020; the world is still in the best of order for “Impex” (name changed). The first year of the pandemic is drawing to a close and Impex is emerging stronger than ever. The signs for 2021 point to strong growth with sales expected to grow by over 20%. The return on sales forecast to reach a high double-digit percentage. Particularly in the UK market, Impex have very ambitious plans to really take off in 2021.

Impex has enjoyed close and stable relationships with its Chinese manufacturing base for many years – heavily reliant on supply chains which are highly dependable and very cost effective. The goods produced predominantly transported from China to Asia by sea freight with several hundred containers per year being shipped.

The situation gradually started to shift in November 2020. The container freight rates, which had been stable at an average of around $2000 per container, initially raised by the freight forwarder to around 2500. In this situation, the first containers were "rolled", and not loaded onto the originally planned ships. This created a period of intense discussion within the management team as to whether a contract should be closed with a forwarder at a price of around $ 2500. With the management team finding it understandably difficult to sign off on such an increase -?after all, this represents a cost increase of 25%, after all it is a known fact that “after Chinese New Year prices will go down again”.

However, as has become a well documented set of events….things were about to turn out very differently, and you could say that Impex got caught in a perfect storm, which saw:

?- The containers were transported for an average of $ 11,000, more than 5 times more expensive than originally calculated

- Due to massive delivery delays, delivery contracts could not be fulfilled. Accordingly, customer dissatisfaction rose sharply

- Brexit,?and its initially chaotic effects on customs and transport, resulted in Impex not being able to offer any deliveries to the UK until September 2021. This had a catastrophic effect given that the original plan was a 30% UK revenue share….

- Raw material prices have skyrocketed by approx. 35%!

The originally targeted profit margin melted as a result of these influences like butter in the sun. With a certain amount of luck and a lot of skill, Impex will after all be able to make a profit for the year 2021, but the impact of this perfect storm had a devastating effect on the business plan Impex were working to.

This report describes a real-life example in times of supply chain disruptions. There are an untold number of other companies who have had to go through very similar experiences in the past year. However, not all companies have been able to start this year with such a comfortable financial starting position as Impex.

Many, especially smaller companies, have found themselves in existential difficulties or have had to give up completely.

What lessons can we learn from this story? I am far from giving any advice here; in retrospect that doesn't help at all.

What this year has taught us, however, is the fact that no matter how sophisticated and how previously reliable they may have been, forecasting systems based on historical data have failed.

A derivation of future developments from empirical data from the past does not work, even if a whole series of "black swan" events cross paths that have been so stable over many years.

Previously unimaginable events have impacted the market which have brought this home – for example, who would have thought it possible that supply chains could become out of step because of a huge container ship getting stuck in the Suez Canal and thus block global shipping?

Today more than ever, companies and their managers responsible for purchasing and supply chain are required to keep themselves permanently informed about the entire supply chain situation. To this end, new information channels need to be opened up - Observations of short and medium-term trends should be permanently included in the decision-making processes.

TEP - the global panel of transport experts, would like to provide this additional source of information. Through regular surveys of those involved in the supply chains, TEP is a facility to monitor capacity and demand developments and sudden changes and recognize obstacles as early as possible.

You can find more information at?www.tep-global.com.