By TimothÃ©e Aeppel
(Reuters) – Along with the supply chain headaches that everyone battles – from stuffy ports to empty store shelves – Ryan Gunnigle is focusing on the potential of the opposite problem: glut.
âCustomers are just throwing crazy orders right now, so it’s hard to determine the actual level of demand,â said the CEO of Kids2, the Atlanta-based toy company, best known as the maker of Baby Einstein and other brands focused on babies. Business always increases during the holidays, but this year has been rocked by the pandemic.
A major danger in today’s environment, he said, is that companies order too much merchandise as they scramble to fill orders, especially as the holidays approach, which could quickly lead to stacks of baby e-books and high chairs. once the crisis has subsided.
Some economists are also seeing signs of a spike in demand, easing inflationary pressures in the coming months.
Nancy Lazar, head of economic research at Cornerstone Macro, told a seminar Friday that spending on items like furniture and computers – which exploded during the pandemic – has already cooled and demand for many Consumer goods will decline in 2022. This drop in demand will come as supply chain bottlenecks ease, “both putting downward pressure on prices,” she said.
Global producers all face similar risks.
The natural response of retailers and other businesses dependent on remote factories – including Kids2, which produces in China – is to increase orders because they fear they will run out of merchandise before their stocks can be replenished. This amplifies the problem as the rush creates an even greater increase in orders at remote factories, a process known as the boost effect. The pandemic and the energy crisis in China make the situation particularly tense.
Gunnigle said he sees signs of an easing of the supply situation, including a slight drop in the cost of booking shipping containers and fewer “blank crossings” when one of their cargo crates missing its place on a ship from China.
“We’re starting to see things go a little easier,” he said.
That said, the curved balls keep coming in, making it difficult to plan amid so much uncertainty.
Consider the power shortages that are disrupting Chinese factories in parts of this country. Gunnigle has just learned, for example, that the Chinese factory that produces baby teethers for Kids2 has stopped production until the energy problem is resolved. This producer uses a type of plastic whose cost has skyrocketed, which, together with soaring energy prices, is making its production unprofitable, he said.
Gunnigle is in a good position to assess the danger of piling too much cargo. As many of its competitors have moved to other countries, it has doubled its stake in China – recently opening the first phase of an industrial complex on the banks of the Yangtze River in central China for a cost $ 20 million.
This factory, together with a joint venture factory, manufactures half of the products the company sells globally, with most of the rest coming from other Chinese factories. âI think our response time has been much better than our competitors because of this,â he said, noting that as early as May Toys2 added up to two and a half months to the time it expected to receive goods from China – on top of the normal 70-day average.
âWe have really inflated our deadlines,â he said. “Not just in the manufacturing – but in our estimates of how long it takes to get to the port, get things on the ships, the time to unload the ships.”
Earlier this year, the bottleneck was in China. Having its own factory and a close relationship with its joint venture producer allowed it to quickly shift production towards the production of products facing the biggest bottlenecks. The company also prioritized the goods it put in its containers, in order to maximize shipments of the most requested items.
The problem has now shifted to the United States, focused on Southern California, where more than 100 ships were waiting earlier this month to access the ports of Los Angeles and Long Beach.
That will change further in the coming months, said Gunnigle, who said his operations team is now focusing on the bottlenecks that will form in China later this year and early next year, “because containers on the west coast and east coast are not being returned to China quickly enough to restock goods from China to meet first quarter demand.”
All of the company’s early work is one of the reasons it closely monitors the risk of oversupply. âThere is a lot of inventory in the pipeline,â he said. “I just want to make sure we don’t get stuck with too much.”
(Reporting by Timothy Aeppel in New York; additional reporting by Howard Schneider in Washington; Editing by Dan Burns and Matthew Lewis)