S&P: 10% list 4 tariffs more damaging than previous 3

Dive Brief:

  • The impending 10% tariffs on $300 billion of Chinese imports, set to go into effect Sept. 1, would be more damaging than the previous three tranches because it includes more intermediary and finished goods, according to a report from S&P Global emailed to Supply Chain Dive.
  • As a result, S&P expects major firms, including Cisco, Dell, HP and Seagate, to raise prices or shift production and sourcing to Southeast Asia to compensate for projected revenue losses.
  • S&P, along with the Consumer Technology Association (CTA), expressed concern that whiplash from the trade war could hamper tech companies’ ability to innovate at a time when the U.S. and China are currently racing to develop and deploy artificial intelligence (AI), machine learning and 5G technologies.

Dive Insight:

According to the CTA, the upcoming tariffs include smartphones, laptops, smartwatches, wireless earbuds, lithium batteries and more. While consumers can expect varying degrees of price increases from brands if the 10% tariffs go into effect, changes in the cost of completed goods only tell a small part of the story.

Tech companies are looking to retool and diversify their supply chains in China and Southeast Asia, which is a resource drain and means less cash is available to invest in innovation, CTA Vice President of International Trade Sage Chandler told Supply Chain Dive. Many of the companies she works with rely on cheap manufacturing in China to invest in research, new designs and high-tech AI and machine learning applications in the U.S.

“A lot of the pieces of the supply chain that the administration is trying to help are actually getting hurt because now these extra companies do not have the extra income to pay those higher paying jobs here in the U.S.” Chandler said.

When a 25% tariff on $300 billion worth of Chinese goods was under consideration earlier this year, many firms echoed this sentiment, including Apple, saying they would be forced to reduce investment in or cut high-value research and manufacturing jobs in the U.S. due to increased supply chain costs from moving out of China.

“If you take their suppliers away from them what’re they going to do?” Chandler said. “They’re going to spend their time and resources finding another chain of supply.”

Chandler said the September date for the new 10% tariffs is coming at a terrible time for American firms as many are entering into new contracts for supply for the back to school and holiday seasons. While some of the bigger tech firms can survive a margin hit midway through this process, Chandler said 80% of the CTA’s approximately 2,400 members are small to medium-sized enterprises that might not be able to withstand the extra pressure.

“They get enough capital together to get prototypes done, run it over to China to manufacture and they’re in the water on the way back and the tariffs hit and they don’t have enough money to get their cargo out of customs. That is happening to a lot of our members” Chandler said. “There’s gonna be a lot of small and medium companies that … will go out of business because they can’t survive that cycle of going back to their board or the bank to get funding.”

08 August 2019 | Morgan Forde | Supply Chain Dive

Tariff whiplash is already taking a toll on retail

Retailers and brands have been scrambling to source elsewhere besides China, but it’s not easy, quick or even possible for everyone.

Welcome to the era of trade chaos for retail.

Beginning in May, retailers lived with the official reality that a huge swatch of Chinese goods — known as “tranche four” and covering pretty much everything that hasn’t already gone through tariff increases already — would get a 25% tariff. Retailers and analysts from nearly every sector warned of price hikes for consumers, disruptions to their supply chain and margin hits. Some companies began rushing in imports to beat the tariffs.

And then the industry got a respite, as the Trump Administration hit the pause button on the tariffs and opened up trade talks with Chinese leadership. You could almost hear the collective exhale of relief from brands and retailers around the country. Maybe the tariff apocalypse wasn’t coming, after all.

And then last week, in but a moment — a tweet — the wails and teeth gnashing resumed. President Donald Trump announced the administration would move forward on a reduced — but still substantial at 10% — round of new import taxes on $300 billion in Chinese goods, set to begin Sept. 1. Higher tariffs were not ruled out, and Trump indicated they could go even higher than the previous 25% mark.

Industry response was swift and severe.

“As we’ve said repeatedly, we support the administration’s goal of restructuring the U.S.-China trade relationship,” David French, the National Retail Federation’s senior vice president for government relations, said in a statement Friday. “But we are disappointed the administration is doubling-down on a flawed tariff strategy that is already slowing U.S. economic growth, creating uncertainty and discouraging investment.”

“Tariffs are taxes on American consumers,” Rick Helfenbein, president and CEO of the American Apparel & Footwear Association, said in a statement emailed to Retail Dive. “The President’s decision to proceed with adding these additional costs for hard-working American families is truly shocking.”

Matt Priest, CEO of the Footwear Distributors and Retailers of America trade group, said in a statement that his group was “dismayed” at the decision. “We will not take this news lying down,” he added. “This is one of the largest tax increases in American history and it is vitally important that we fight this action on behalf of our consumers and our industry.”

The dominant supplier

Retailers and brands have been shifting their sourcing away from China since Trump took office. A 2018 survey by the United States Fashion Industry Association (USFIA) found that a majority of companies said they are planning to cut back on the share of their product that is manufactured in China.

Even so, China remains the “dominant supplier,” accounting for 49% of total textile and apparel imports to the U.S. by quantity in 2018, USFIA said in a March report emailed to Retail Dive. The next largest supplier country is India, with a fraction of that amount at 8.1%. For just apparel, China is also the top supplier, but Vietnam grabs the second spot.

Where companies source their products would obviously determine to a large degree how they would fare when the tariffs launch.

“There are varying degrees of companies with exposure,” Mike Zuccaro, Moody’s senior analyst and vice president, told Retail Dive in June. He pointed to G-III Apparel Group, which does 86% of sales in the U.S. (where the tariffs would hit) and sources more than 61% of its products from China. “So that’s pretty hefty.”

Analysts with Cowen and Co. have also pointed out several retailers and brands that source heavily in China, among them American Eagle Outfitters (45% sourced in China), Boot Barn (44%), Target (30%), J.C. Penney (30%), J. Jill (30%), Macy’s (25%) and Kohl’s (20%).

In an ideal world, retailers and brands would shift sourcing to another country with relatively cheap and skilled labor so as to dodge the new duties.

B. Riley FBR analysts led by Susan Anderson said in a June note that many of the apparel and footwear companies they follow are working to shift their vendor base to other countries, mainly Vietnam, Cambodia, Bangladesh, Indonesia and India. In all, Anderson’s team estimates that the share of Chinese sourcing among the companies they cover went from 36% in 2017 to 29% in 2018.

The costs of moving out of China

Shifting supply chains is not easy, and doesn’t come without cost. For instance, Katie Tangman, Columbia Sportswear’s director of global customs and trade, testified in June that it would cost at least $3 million to move its remaining production operations out of China. Those costs include new machinery and training a new workforce.

Zuccaro said that it could take a year or two to find the equipment and move it into other countries. “Some companies have been able to move some things pretty quickly. But was that kind of low hanging fruit?”

“You have to look for places that can make your product in a quality manner,” he added. “You might be able to move something quicker, but if it’s a higher-end brand that really focuses on quality and craftsmanship and things like that … it might take a little while to just have to train people and build that up.”

Moreover, as the industry tries to shift to those other countries, they’re running into capacity limitations, Zuccaro also noted.

S&P Global analysts in a June report also pointed to near-term capacity constraints, especially for skilled manufacturing. “It is very difficult to replicate China’s well-developed and integrated technology supply chain elsewhere,” S&P analysts led by Jennelyn Tanchua wrote.

In some cases, replacing Chinese production might be nearly impossible, at least in the short-term. Take wedding apparel. Steve Lang, CEO at Mon Cheri Bridals and current president the industry group American Bridal and Prom Industry Association, told Retail Dive earlier this summer that his own company sources about 90% from China. The reasons for that have to do with more than cost alone.

“The Chinese have been good at embroidery and beading for 5,000 years,” he said. Moreover, factories for wedding apparel are more involved than those that make, say, T-shirts. Facilities must be air conditioned (because sweaty hands can stain white satin and other fabrics) and laborers need to be skilled. “We have a very, very technical product.”

Making things more difficult, new factories in places like Myanmar, where U.S. companies are shifting production, might prefer to take on easier-to-make products rather than wedding dresses, which could be a loss-maker for factories in the initial years, Lang added.

Eating tariffs

Costs started stacking up before tranche four had gone into effect and subsequently put on ice (only to be revived again). The National Retail Federation reported imports in May, the month after Trump announced the tranche four tariffs plans, would rise an estimated 4.2% from the previous year.

“The threat of tariffs is just about as impactful as actual tariffs, meaning people are scrambling, people are looking, people who are diversifying out of China are stepping up that process or expediting that process,” FDRA’s Priest told Retail Dive in June while the industry was preparing for the announced 25% tranche four tariffs.

As one example, Priest spoke with one of his members that had moved in 100,000 pairs of shoes earlier than planned and was trying to figure out the logistics of pushing those to its distribution centers, he said.

Rushed imports might beat the new tariffs, but they carry risks of their own given the ramped-up modern sales cycle. “Consumers are changing, their attention spans are shorter, the desire for fresh product is strengthened,” Priest said. “And when you have to kind of adjust to these artificial political timetables, to get product in to avoid duties, then I think it can disrupt the normal kind of cadence that you’ve established in the 21st century for American consumers.”

In some cases, retailers and brands might be able to renegotiate with their vendors, and effectively share the tariff burden with them. As Moody’s senior analyst and vice president Raya Sokolyanska pointed out in a June interview with Retail Dive, the yuan had depreciated shortly after a previous tariff increase on furniture, changing the relative cost of the goods. “So it was easy to go back to the vendors” and ask for price decreases, Sokolyanska said.

Moody’s department store analyst Christina Boni noted in an interview that scale and size matter. Those that are larger and of more importance to customers have more leverage to negotiate with vendors.

“The vendor needs you just as badly as they need as you need them,” Keith Daniels, a partner with investment and consulting firm Carl Marks Advisors, told Retail Dive earlier this summer. “Retail is the vendors’ customer. So I think the retailers will have the have the majority of the leverage.”

But there are limits.

“In essence, I think the headline is that you’re not going to be able to re-engineer it at all, you’re not going to get the vendors to eat it all,” Moody’s Boni said. “The consumer is going to have eat some of it … on some level.”

05 August 2019 | Ben Unglesbee | Supply Chain Dive

Trump: US to impose 10% tariffs on $300B in Chinese goods

UPDATE: Aug. 2, 2019: Trump told reporters outside the White House Thursday negotiators from the U.S. and China would meet again in early September. He said the reason for the Sept. 1 tariff implementation date was not to allow negotiation time, but rather because “it takes a long time for the ships to come over.”

Trump also alluded to the possibility the 10% duty rate could increase or decrease, depending on the outcome of negotiations. “It can be lifted up to well beyond 25%,” he said. “But we’re not looking to do that necessarily.”

Hua Chunying, spokesperson for the Chinese foreign ministry, said China is prepared to retaliate with “necessary countermeasures,” according to multiple news reports.

Dive Brief:

  • The U.S. will impose a 10% tariff on the remaining $300 billion worth of imports from China, known as list four, beginning Sept. 1, President Donald Trump tweeted Thursday afternoon.
  • The series of tweets came after U.S. representatives returned from trade talks with Chinese officials. Trump described the talks as “constructive,” but said China had agreed to buy agricultural products from the U.S. “in large quantities, but did not do so.”
  • Trump said the negotiations between the two nations will continue. Further details were not immediately available from the White House, the Office of the U.S. Trade Representative (USTR) nor the Chinese government.

Dive Insight:

Starting at the beginning of next month, every good coming into the U.S. from China, except those with exemptions, will have an import tax, ranging from 10% to 25%.

The tranche four tariffs on $300 billion worth of goods has been in limbo for several months, first as a repeated threat from Trump, via speeches and twitter.

The threat came closer to reality in May when USTR released a 136-page list of products to face tariffs up to 25% and held a comment period plus seven days of public hearings on the matter. In late June, Trump said he wouldn’t impose the list four tariffs “for the time being.”

Executives on earnings calls have warned about the effects of tranche four tariffs on their businesses, noting the potential for eroding margins and higher costs being passed on to consumers. Macy’s called this round “the big one.” The National Retail Federation said tariffs at 25% would be “too large” for retailers to absorb, though it did not specify at the time how 10% tariffs would affect retailers.

02 August 2019 | Shefali Kapadia | Supply Chain Dive

Rail service is at an all-time low, shippers tell House committee

Dive Brief:

  • Precision-scheduled railroading (PSR) is driving discord between railroads and their customers, a roundtable of rail shippers told the U.S. House of Representatives Subcommittee on Railroads, Pipelines and Hazardous Materials Thursday.
  • Reduced headcount, service changes without notice, fewer yards in operation, insufficient locomotives, increased demurrage and accessorial charges — all on top of higher rates, drove several shippers to remark that though railroad profitability is climbing, service is at an all-time low.
  • “They may claim that PSR improves service but our experience and that of many other shippers has been the opposite,” said Emily Regis, fuels resource administrator for the Arizona Electric Power Cooperative, speaking on behalf of the Freight Rail Customer Alliance. Regis and the other speakers called for more involvement from the Surface Transportation Board (STB) and members of Congress in providing structure to help shippers in disputes about rates and fees related to PSR.

Dive Insight:

The debate between shippers and railroads on the merits of PSR, characterized by cutting lanes, yards and locomotives in order to deliver more consistently on time and increase operational speed, has raged since CSX first began overhauling its operation in 2017. But now that six of the seven Class I railroads are adopting the principles demonstrated by the late Hunter Harrison at CSX and Canadian National before that, more shippers are affected.

Randy Gordon, president of the the National Grain and Feed Association told the members: “For our sector, PSR has resulted in increasing arbitrary, abrupt and disruptive changes to operations plans and service schedules, often negating tens of millions of dollars in customers’ investments in their facilities, track space and other infrastructure that the railroads insisted that they make in order to continue to have rail service.”

A particular focus of the discussion was demurrage and accessorial fees. Railroads levee demurrage fees when rail cars exceed prescribed loading and unloading time. Accessorial fees include charges for any event or service other than the movement of freight from origin to destination — examples include weighing cars, diverting a shipment in transit or additional switching services.

In the age of PSR, railroads claim the increased focus on speed warrants stricter adherence to schedules, resulting in such fees when scheduled times aren’t met. At the hearing, shippers claimed the application of these fees is inconsistent and unfair in how and to whom they are applied.

“Kinder Morgan doesn’t argue or contest the purpose or concept of demurrage. Our concern lies in a one-sided and monopolistic methodology by which the railroads assess, bill and attempt to collect these charges,” saidJosh Etzel, vice president of operations at Kinder Morgan, the largest terminal operator in North America. Etzel said his company is involved in multiple lawsuits with railroads and customers over these fees. And the issue of who is liable for the fees warrants review by the STB, Etzel argued.

Several speakers, including Rep. Dan Lipinski, D-Ill., expressed the impression that railroads view such fees not as simply a deterrent, but as a revenue stream.

“Since the adoption of PSR [International Paper] has seen our demurrage more than double to over $7 million,” added Mike Amick, senior vice president at International Paper.

The testimony supported the view that under the priorities inherent in PSR, railroads are more focused on investors and regulators than shippers.

“In the rail industry, the customers are not the primary concern …the federal government is the primary concern. And they want to keep the system exactly the way it is now,” said Mike Lacey, president of Solvay Chemicals.

26 July 2019 | Emma Cosgrove | Supply Chain Dive

Toyota looks to develop ways to disaster-proof its supply chains

Toyota Motor Corp. has been applying its kaizen (continuous improvement) principle to the management of its parts suppliers so that it can maintain or swiftly resume production in the event of natural disasters.

As it took the firm weeks to confirm the damage to its suppliers following the 2011 Great East Japan Earthquake, forcing it to reduce production for months, Toyota has developed a supplier database to quickly grasp the effects of disasters on its supply chain and mitigate the impact of disruptions by securing alternative suppliers.

When a major earthquake hit Niigata Prefecture on June 18, registering an upper 6 on the Japanese seismic intensity scale of 7, the firm managed to confirm in half a day — thanks to the risk management database — that no damage was caused to its parts supply system.

Since a vehicle is made up of some 30,000 parts, Toyota’s complex network of suppliers across various tiers is spread widely like the branches of a tree.

At the time of the 2011 disasters, although Toyota employees worked day and night, it took three weeks to identify the damage to the supply chain. The automaker had to halt production for two weeks and reduce production for another six months.

The delay in the initial response forced the firm to reduce its planned vehicle production up to June 2011 by 760,000, although it managed to make up for much of it after production returned to normal later in the year.

Learning from this experience, Toyota in 2013 worked with tier one suppliers to develop the Rescue System, a database to visualize supply networks according to each component. In the case of car lights, for instance, suppliers of lenses and companies in charge of treating the lens surface, resin materials, paints and additives are shown in a diagram along with information such as the location of their production facilities.

Currently, as many as 400,000 parts suppliers are registered on the system. If a disaster occurs in a certain area, Toyota can immediately identify parts at risk.

Visualizing the supply chain also helps identify components that are supplied by only one manufacturer and are difficult to replace with alternatives.

Toyota is working to decrease dependence on such components by reducing unique designs and sharing information on equipment specifications among its in-house parts production facilities and suppliers.

In doing so, Toyota has succeeded in securing alternative supply chains for most of its parts, except for some components such as semiconductors that need complex processing, but which Toyota would stock up on.

Establishing this backup system means suppliers have to disclose some of their know-how, which might include industrial secrets, but cooperation went smoothly because of the longtime tradition of Toyota group firms and suppliers supporting each other — including rival firms — during disasters and emergencies.

Still, concerns remain for Toyota’s suppliers, many of which are concentrated in Aichi Prefecture, as a massive earthquake is predicted to occur within the next 30 years along the Nankai Trough, which extends southwest along the Pacific coast of central Japan.

Moreover, the supply chain itself is constantly evolving along with changes in consumer needs, such as the growing popularity of hybrid vehicles and electric cars.

“There is no end to efforts to prepare for disasters, in the same way as everyday kaizen activities,” said Toyota’s senior employee in charge of procurement. “We will continue identifying new challenges and take measures to cope with them.”

26 July 2019 | CHUNICHI SHIMBUN | Japan Times

77% of procurement professionals expect a recession by 2021

Dive Brief:

  • 77% of procurement and finance professionals expect a recession to hit in one to two years, and 30% said they are mostly or completely unprepared for one if it occurs, according to a survey of 104 procurement and finance pros from finance analytics firm Suplari.
  • 82% of the companies represented in the survey are focusing on cost savings this fiscal year compared to 76% last year. The majority of respondents said they plan to reduce costs by scrutinizing office supply and travel spending, renegotiating contracts, consolidating vendors, implementing cost-saving technologies and delaying project expenditures.
  • “Finance and procurement professionals … are likely to be the first in their organizations to perceive and deal with the impact of a recession,” Nikesh Parekh, co-founder and CEO at Suplari, said in a press release. The report encouraged procurement leaders to ready themselves for the potential downturn not only by reigning in costs but ensuring they are proactive about gaining visibility into their suppliers’ stability and operational continuity risks across multiple tiers.

Dive Insight:

Despite a decade of sustained economic growth since the 2008 recession, analysts are increasingly worried that a tight employment market, credit market risks, trade uncertainty and other factors are pushing the economy toward a decline.

Respondents feared a recession would lead to budget cuts on procurement spending, layoffs in their departments and the loss of suppliers and contract partners.

To hedge against this, most procurement managers are setting savings goals of between 5%-14%, with potentially more cost-sensitive small and mid-size firms setting higher goals than their larger counterparts.

As procurement managers work to reduce spend, the report analyzed where that additional cash is going. 67% of respondents choose to reinvest in “longer-term and expansion projects,” 61% put the funds into strengthening their bottom line and 52% focused on reinvesting within individual department budgets.

These priorities shifted somewhat depending on the size of the company, with 74% of large companies ($1 billion or more in revenue) preferring to reinvest in their bottom line and 64% of small companies (with revenues under $250 million) preferring to invest in specific departments.

While there is yet to be a definitive indicator that proves a recession is imminent, the report respondents stressed a “better to be safe than sorry” approach that they hope will ensure they come out on top.

18 July 2019 | Morgan Forde | Supply Chain Dive

Toyota to partner with world’s largest electric car battery supplier

Dive Brief:

  • Toyota will enter a comprehensive partnership with Contemporary Amperex Technology (CATL), the world’s largest supplier of electric vehicle (EV) batteries, the automaker announced this week.
  • The deal includes the production of EV batteries and new energy vehicle (NEV) batteries for plug-in hybrids, the development of new battery technology and the reuse and recycling of spent batteries, according to a press release.
  • The move comes after Toyota launched EV battery partnerships with Chinese supplier BYD and Panasonic, one of Tesla’s current suppliers and CATL’s competition for largest battery supplier.

Dive Insight:

Like many of its competitors, including BMWFord and Volkswagen, Toyota is working to accelerate the development of its electric and hybrid vehicles. Partnering with CATL will help the automaker secure supply in an increasingly competitive race to scale up EV production in the next five to 10 years.

Currently, EV batteries remain one of the most difficult components to manufacture in-house and the vast majority of the raw materials and suppliers are based in China. As a result, Toyota, Volkswagen and other firms are focusing on forging partnerships and joint ventures to get operations up to scale quickly and ensure supply is in place as overall manufacturing ramps up.

The additional benefit of sourcing in China is proximity and access to the country’s own growing market for consumer EVs. Toyota announced the launch of its first two all-electric vehicles for the Chinese market earlier this year which will be available starting in 2020. In the announcement, the company said this expansion is part of a global strategy to encourage greater EV/NEV adoption worldwide.

In addition, Toyota is expanding into the Indonesian market, first with hybrid models and eventually all electric ones, according to a Reuters report from June. The automaker plans to invest $2 billion in the venture. “Because the Indonesian government already has an electric vehicle development map, Toyota considers Indonesia a prime EV investment destination,” Toyota President Akio Toyoda said in a statement.

According to Bloomberg, Toyota forecasts global annual sales of 5.5 million EVs by 2025.

17 July 2019 | Morgan Forde | Supply Chain Dive

Trucking data shows signs of recession

Dive Brief:

  • This month, multiple organizations that track the trucking industry reported the sector is heading toward, or is already in, a recession.
  • ACT research showed two quarters of negative sector growth, DATreported a 50% decline in year-over-year freight spot market loads and the Cass Freight Index for May 2019 saw declining freight shipment levels. All three organizations point to a possible “economic contraction” in the trucking industry in the coming year based on these factors.
  • In a recent DAT blog post, financial analyst Donald Broughton said the economic outlook shifted. “First, it was ‘We don’t expect growth to be as strong as 2018, but see no reason to predict a recession,” he wrote. “Now, it’s ‘in almost every sector, in every mode of transportation, in every part of the globe, freight flows are signaling economic contraction.'”

Dive Insight:

Earlier this year, economists forecast a potential slowdown in the trucking industry in 2019. DAT data predicted a negative impact of tariffs on the freight market. Part of the problem stemmed from shippers rushing inventory into the U.S. to avoid tariffs, which pushed freight rates upward as trucking capacity strained to keep up.

Now however, this trend has begun to slow down and DAT has reported dramatic decreases in load volumes across the spot market as well as in its van, flatbed and reefer load-to-truck categories.

DAT Trendlines
Category Year over Year
Spot Market Loads -50.3%
Spot Market Capacity +29.9%
Van Load-to-Truck -50.3%
Van Rates (Spot) -18.5%
Flatbed Load-to-Truck -74.5%
Flatbed Rates (Spot) -18.45
Reefer Load-to-Truck -55.5%
Reefer Rates (Spot) -16.8

SOURCE: DAT Trendlines

The trucking industry often experiences seasonal fluctuations, though not all of them lead to predictions of a recession, ACT President Kenny Vieth told FreightWaves.

According to the Cass Freight Index for May 2019, which ACT cited in its own recession predictions, “The weakness in spot market pricing for many transportation services, especially trucking … along with airfreight and railroad volume data, strengthens our concerns about the economy.” In addition, the Cass report cited concerns about the trade environment and the potential for future disputes, which have made its predictions more concerning than the average seasonal decline.

15 July 2019 | Morgan Forde | Supply Chain Dive

5 steps to successful supplier negotiations

In some situations, negotiation is a contest with a clear winner and loser. Think about your last automobile, mattress or real estate purchase, where price was everything and the relationship fleeting and insincere.

That model shouldn’t apply to the procurement world. Negotiation is not just about price, but about managing and improving overall supplier performance. Negotiation is an underutilized, yet critical business skill that lies dormant within most organizations.

There needs to be a broader approach around supplier performance, including measurable criteria such as accurate and timely deliveries, high quality, strong customer support, reduced supply chain risk, great communication and cost management.

The actual bottom line of a supplier relationship is far deeper than the price on a purchase order.

Successful supply chain management is anchored on excellent commercial relationships with critical suppliers. The benefits of close relationships include a focus on cost rather than price, early supplier involvement on key commercial and technical aspects, improved supplier performance in the areas of quality and on-time delivery and an abundance of communication.

While strong supplier relationships have proven beneficial to the buyer and seller, these relationships are not a replacement for active and ongoing negotiation. If one looks at negotiation with the big picture in mind — ongoing give and take with trustworthy and high performing suppliers — it can be an agreeable experience where both sides meet their objectives.

It is important to keep the relationship in perspective; a relationship with a supplier is not an excuse for lack of due diligence. Buyers need to focus on negotiating and establishing the performance framework early in a supplier relationship to allow for continuous improvement. Approach negotiation with a holistic approach.

This five-step process will help to build the foundation critical negotiations with critical suppliers of all types.

1. Understand your mission and business drivers

It is essential to understand the fundamentals of your own business so you can develop a negotiation strategy that complements the overall strategy. What are the essential business objectives of your company? What markets do you serve, who are your customers, what are their requirements and what are the operational goals of your business? Without a strong understanding of the business issues that makes your organization tick, you will never be able to successfully negotiate at any level.

A company that is quickly trying to build market share may be less focused on cost and more concerned with rapid deliveries. A negotiation based purely on low cost would not offer the proper business alignment. Suppliers will do their best to understand your business and craft a negotiation strategy to exploit your areas of weakness. It is your obligation to know more about your own business than they do to offset their potential advantage.

Are we heading toward 24/7 logistics services or are we already there?

As 3PLs extend service hours and days, constant deliveries seem inevitable. But experts say retailers and even consumers are keeping a solid floor under e-commerce delivery times.

In April, Amazon announced the standard shipping speed for Prime purchases would transition from two days to one. Walmart responded within three weeks with its own next-day shipping transition. Two weeks after that, FedEx announced it would extend its ground service from six to seven days per week in 2020. And less than two weeks ago, FedEx COO Raj Subramaniam announced Target has joined Rent the Runway in taking advantage of FedEx’s “extra hours” late pickup service for e-commerce orders.

E-commerce fulfillment and delivery is stretching — extending into hours and days it has historically not touched. Individually, each of these moves may seem like a small shift. In fact, Supply Chain Dive reported Amazon’s two to one-day shift for Prime orders requires little operational change. But together, these service changes lead to the question: How long before the last mile of the supply chain runs constantly?

“Non-consumer-facing transportation, whether it’s ocean containers and airplanes traversing continents or full truckloads over the road moving between distribution centers — those operations have been 24/7 for a long time,” said Rob Taylor, CEO of Convey, a last-mile visibility tech provider. Consumer expectations, Taylor said, and automation are causing that “always on” mentality to bleed into the last leg of the journey too.

“The only thing that’s missing is, are we gonna start delivering packages to people’s doorsteps at 3am?” Taylor asked. “While that capability certainly already exists today, the question is how necessary is that and do we sort of enter the land of the creepy when people are coming on to your property at 3 a.m.?”

The framework is already here

Tray Anderson, logistics and industrial lead for the Americas at Cushman & Wakefield, told Supply Chain Dive delivery timelines have relatively little to do with the speed of logistics services. Shippers can ship on Saturday for Monday delivery or even arrange Sunday pickups, depending on their contracts with 3PLs and proximity to 3PL facilities.

“It’s all possible but it’s not going to be at a one-off demand basis. This is going to be planned demand where you’re giving committed volume for the capacity you’re asking for,” said Anderson.

Respondents were permitted to choose more than one option so percentages do not add up to 100.

Essentially, a near-constant logistics framework is already here. The logistics services are out there to deliver at almost any time — for a price. Mondays are still a bit dicey for standard service, but at this point, the calendar for last-mile logistics has few blackout dates. Anderson argued it’s down to the retailer to get the order out the warehouse door in time to take advantage of these services.

“As a shipper, I’m in complete control of my cycle time — the time my customer clicks to the time it actually ships from my building. If I can take my cycle time down to two hours or even 20 minutes, versus a day from the time the customer clicks til it ships, that is time I’m taking out of the total delivery time,” explained Anderson.

Beyond cycle time, speed of delivery also comes down to starting location. Anderson said a retailer can offer two-day shipping to the entire U.S. with just five locations — if the right product is in the right warehouse and demand sensing is tuned.

“I can have a single ship point and provide early morning service to the vast majority of the U.S. population. It’s a premium cost to do that, but there are companies today in areas that have big inventory value, like pharmaceutical, choosing that,” he said, adding that what’s physically possible isn’t necessarily profitable.

When it comes to delivery time, Amazon and Walmart dominate the narrative, Tom Enright, vice president of consumer and retail supply chain research at Gartner, told Supply Chain Dive, but they don’t represent most retailers. Most retailers deliver e-commerce orders in about four business days, according to Enright — down from six days two or three years ago, but still nowhere near one or two.

Speed isn’t everything

Amazon and Walmart may be the professionals in the e-commerce marathon, but the rest of the runners are still living in a world governed by business hours and consumers sleeping (as humans tend to do). In fact, it’s retailers, and to some extent, consumers that are keeping a floor under e-commerce order delivery times, according to the experts.

“The vast majority of fast deliveries are not free. All the evidence is people are willing to wait longer because free shipping is the thing… this hysteria around having to pay for shipping is still very strong,” said Enright. In fact, a recent survey by BigCommerce, an e-commerce software vendor, found four in 10 U.S. consumers refuse to pay for two-day shipping — this, according to the survey report, is where Amazon has left its mark. The survey found consumers are much more comfortable paying for overnight shipping.

Respondents were permitted to choose more than one option so percentages do not add up to 100. 

Enright believes the future of e-commerce fulfillment is about nudging consumers toward the most preferable option for the retailer — especially for items with no real urgency. A 5% discount for in-store pickup or Amazon’s digital video incentives for choosing a “no rush” shipping option are examples.

A Hanover Research and LaserShip survey published earlier this year indeed found 50% of 1,000 consumers surveyed would abandon their carts due to high shipping charges. BigCommerce, which surveyed nearly 3,000 global consumers, got the same result.

The research shows a free shipping option is paramount, even with conditions. LaserShip’s consumers expected delivery within three days or fewer — this is a far cry from one or even two days, but it must be noted the survey was completed before the Amazon Prime one-day announcement.

Still, in a world where the fastest standard shipping speed is next-day, three days is starting to sound long. What’s clear is shipping fees and shipping time expectations present a reasonable trade-off in the minds of consumers — meaning they may be more malleable than the “speed at all costs” narrative propagated by Amazon and Walmart suggests.

“When we talk to retailers who say ‘I want to do same-day or next-day,’ our next question is, show me the mandate from your consumers,” said Enright. “Very often companies will have a mandate from the boardroom … but not a clear signal from the consumer,” he said.

Anderson said he sees brands sticking to their slower delivery times with confidence and providing a great post-purchase experience as a clear sign that speed is not everything.

The limit does exist

If the marketplace isn’t demanding the break-neck gauntlet Amazon is throwing down, then why would 3PLs create new services and spread out their package volume across more hours in the week? Anderson speculated FedEx, with its new days and hours, may be looking to take advantage of less congested driving times, like evenings and weekends.

For FedEx, Anderson said the carrier likely has drummed up the business to support the extra service day already. Extra hours pickups may be added on a client by client basis as pickups come up in any service contract negotiation.

“Instead of if you build it they will come, you’re going to want to have that lined up,” said Anderson.

Enright echoed that sentiment: “If I was running a 3PL, I would be super cautious about going quicker or providing a quicker service unless I had two things in place: one is my retail customers clamoring for it and two, that they are getting a clear signal from consumers that this is what they want.”

When the carrier announced the change, Subramaniam pointed to fast-growing overall package volume as the primary justification. The carrier also said “increasing utilization of existing assets” was another explanation.

When asked about the interest in these extended services expressed by FedEx customers, a company spokesperson told Supply Chain Dive, “We are in discussions with a number of customers who are excited about this enhanced service, including the overall acceleration of the ground network.”

FedEx may also be looking to give Amazon competitors a leg-up on next-day fulfillment with later pickup hours and more days on the road. The experts agreed, however, that a little extra wiggle room from a carrier can rarely make up for a slow or disorderly fulfillment process in the warehouse.

“Expanding FedEx Ground operations to include residential deliveries every day of the week further increases our ability to meet the demands of e-commerce shippers and online shoppers alike. The move advances the company’s commitment to continued superior service and increased efficiency in handling all e-commerce packages- small and large- within one ground network, seven days a week, year round,” the FedEx spokesperson said.

UPS has so far not followed FedEx to seven-day service. Though the carrier’s new labor contract, approved amid controversy in May, did make full Saturday and, more notably, Sunday service an option since the overtime required before the new contract was prohibitive.

When asked if UPS is considering seven-day service, a company spokesperson told Supply Chain Dive: “UPS provides a variety of shipping options to our customers, including next day services for critical delivery, especially for customers in the healthcare industry. We will continue to adjust our portfolio to the needs of our customers.”

Right now, 3PLs move as quickly and as often as they need to, to meet consumer demand within current retailer practices, according to the experts consulted for this report. Unless the vast majority of retailers step up their game, or consumers develop a predilection for midnight deliveries, FedEx’s recent service changes may be the last of their kind for a good while.

11 July 2019 | Emma Cosgrove | Supply Chain Dive

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