NICOLAS VAN PRAET
June 14, 2021
Every day, more than a dozen factories in China and neighbouring countries pump out clothing, bags and other apparel on contract for Canada’s Herschel Supply Co., including the Vancouver company’s iconic Little America backpack, a $129 staple that’s ubiquitous on campuses and commuter trains around the world.
The goods are packed into cargo containers, typically either a 20- or 40-foot-long ridged steel box, and delivered by shipping companies on freighters to global seaports with near-metronomic frequency. Then they’re loaded onto trucks and distributed to local stores.
It’s a highly complex but efficient system that generally works with astonishing fluidity for companies big and small importing into North America – proof that modern logistics can overcome vast distances to get almost anything to market.
Until it isn’t.
Today, unrelenting demand from cash-flush shoppers for certain goods, restocking by companies scrambling to satisfy them as regions emerge from lockdowns, and ever-changing COVID-19 protocols – resulting in more checks and labour shortages at each step of the transportation chain – have created an unprecedented slowdown of goods that is testing the global economy and its distribution networks. Herschel’s contract manufacturers have managed to keep pace. But once the backpacks leave the factory floor, the real pain begins.
The rate to move a container from Shanghai to Rotterdam last month topped US$10,000 for the first time on record, soaring 485 per cent from a year ago, according to the Drewry World Container Index. Costs on other major routes are also climbing.
From Vancouver to Halifax, manufacturers, wholesalers and other companies are scrambling to secure container space on ships at exponential prices to get their goods to Canada. They’re also dealing with rising costs for raw materials and agonizing over whether they have the power to pass on all these added expenses to customers, or whether it’s better to take less profit and absorb the hit themselves.
“This is 100 per cent the worst thing we’ve ever seen,” says Lan Nguyen, Herschel’s senior vice-president of operations and information technology. “This is a global crisis in terms of logistics. And what’s inside a shipping container is kind of irrelevant. We’re all fighting for the same space.”
Fifteen months into the COVID-19 crisis, supply-chain shock has emerged as a top-of mind worry for Canadian corporate leaders, forcing a deep rethink of how to source the materials and goods they need and how much profit they’re willing to sacrifice in the face of rising expenses. Some say it will take months or even years for the capacity constraints and backlogs to ease, a situation that could permanently influence what Canadians can buy and at what price. Roughly 80 per cent of the world’s goods travel by ship.
Some businesses, like Sea-Doo maker BRP Inc., have devised workaround strategies for transportation that have become closely guarded secrets. Others are taking extraordinary steps to realign their sales and production strategies to try and adjust to a situation from which they see no short-term reprieve.
Herschel executives began seeing transportation problems in January, and the situation has only worsened since then, Mr. Nguyen said in an interview with The Globe and Mail. The company is now experiencing shipping delays of three to four weeks (and he notes that “a one-month delay is a big deal” for a four-season business), and it has paid up to 40 per cent more for transport so far in 2021. It normally fills up as much of a container as it can to keep costs in check but is now having to buy capacity whenever it’s available in order to keep goods moving.
“Whatever space we can get, we jump all over it,” Mr. Nguyen says. Information from the company’s freight channels suggest the congestion won’t ease until the end of the year at the earliest, he says, and it could even take a couple of years for the logistics picture to stabilize as consumer spending patterns shift back again toward services, entertainment and travel.
Privately held Herschel, which plots design and production a year or more in advance, is currently planning for lower profit margins as it works through the challenges, Mr. Nguyen says. But there are also internal discussions taking place on how to raise prices while still remaining competitive. “Our franchise bags, you can’t increase [the price] overnight by 30 per cent… It’s a balancing act.”
A similar gut-check is taking place at home accessories design and manufacturing company Umbra. The Toronto-based corporation, founded by childhood friends Les Mandelbaum and Paul Rowan, was one of the first Canadian manufacturers to set up in Asia in the 1980s and now makes planters, coat racks and other products at three company-owned factories in China.
“I’ve never seen, in my entire career, such a disruption in logistics,” Mr. Mandelbaum says, adding closures at southern China’s Yan Tian port have exacerbated the problem. “It’s very hard to plan.”
Prices of the steel, wood and polypropylene Umbra uses to make its wares have increased substantially even as the supply continues, he says. “We can get [material]. The problem is we can’t make any money because we can’t raise prices quickly enough… We have record sales but the lowest profits I’ve ever seen. And it’s depressing because we’re working harder than ever.”
Even the best foresight doesn’t always lead to perfect outcomes. Mr. Mandelbaum anticipated the freight disruptions and loaded up on inventory earlier this year in order to have what he needed. But 50 container loads arrived at once, and Umbra’s two warehouses, in Buffalo, N.Y., and Toronto, couldn’t handle it all. He ended up renting outside storage that has cost Umbra half a million dollars so far this year.
Umbra counts about 1,000 items in its catalogue. It’s now doing a triage of which ones to keep in this high-cost environment and might drop products that can’t sustain significant price increases, he says. It’s a complicated calculation that takes into account the need to maintain market share while tallying a profit. The company is also exploring manufacturing in Mexico as a solution.
“There’s only so much anybody’s going to pay for a plastic trash can or a drapery rod,” Mr. Mandelbaum says. “We don’t want to lose our relationship with the customer. We don’t want to lose our space on the shelf. And so we’ll work for no money for the rest of the year.”
At South Shore Furniture, a family-owned furnishings manufacturer headquartered in Sainte-Croix, Que., president Jean Laflamme says his three factories were on the verge of shutting down recently because the company had trouble getting metal drawer guides, handles and other specialized pieces it typically sources from China. He is now ordering enough stock to last six months instead of the usual three and has also had to import things by plane.
“We’re fighting like the devil in holy water to find suppliers in other countries that can help us,” says Mr. Laflamme. “It’s an ongoing fight. Every day we find a new problem somewhere.”
The appetite for South Shore’s furniture and decor has rarely been stronger, but the company can’t meet the demand, he adds. His team has been forced to slow down production at times in recent weeks to make sure they have enough parts and materials, and they’ve now decided to refocus on a smaller number of products they can crank out with consistency.
Companies that will be most successful in weathering this storm are those with the financial capacity to stock inventory and parts in advance, according to Mr. Laflamme. On the flip side, those with tight cash flows and limited access to credit will be particularly vulnerable. The smallest businesses with no experience navigating the whims of spot-market freight costs might not survive.
Two hours’ drive south, in Valcourt, Que., power sports equipment maker BRP is getting creative in its attempt to minimize the logistical snafus hitting its otherwise booming business. In response to long delays at ports like Los Angeles earlier this year, the company was spending about $1-million to $1.5-million a month to ship some of its key parts and equipment by jet to keep its North American factories on schedule.
The company has since found an alternative, water-based route that allows it to avoid L.A. altogether, says BRP chief executive José Boisjoli. He won’t disclose what the fix is, however, saying he doesn’t want to tip off rivals.
Still, the company says ongoing supply-chain constraints will continue to undermine retail sales growth in the months ahead, particularly as it relates to the availability of certain raw materials. BRP’s biggest problem now is the same one hitting car makers, consumer electronics companies and sectors from biomedicine to telecommunications: It can’t get enough semiconductor chips.
Rather than cutting production, BRP is maintaining output for its Sea-Doos, Ski-Doos and Can-Am brand all-terrain vehicles, and setting aside any models with missing components for final finishing later on. It’s also shifting parts between model types. For example, parts intended for snowmobiles (which are being built now but won’t be shipped out until the fall) are being swapped into other vehicles.
“This is a complete reset of the whole industry,” says Mr. Boisjoli. “Dealers are cleaning out used inventory, new inventory. [Manufacturers] are doing the same. And all of us have a chance to do things better going forward than the system we had before.”
At Lion Electric Co., a maker of electric-powered school buses and commercial vehicles that went public last month, things are “getting more complicated,” says Marc Bédard, the company’s founder and CEO. Sourcing parts is becoming more difficult, costs are up, and the company is spending a lot of time trying to get more visibility into what’s happening with its suppliers and their suppliers.
“There are lots of parts for which we’ve overstocked because we’re saying it’s not necessarily going to be a few days’ delay. It could be weeks. On a bus, for example, there are about 2,000 parts. And there are lots of them that are affected.”
Lion is also ramping up its multisourcing to guard against delays, quality issues and shortages of all types of parts and materials. Fibreglass, which the company uses on the body of its vehicles instead of the traditional steel, is one material that has been problematic, Mr. Bédard says.
Companies on the Prairies are getting hit too. Crestline Coach, a maker of ambulances based in Saskatoon, halted production because it couldn’t get semiconductor chips, according to industry group Canadian Manufacturers and Exporters. Winnipeg’s Eastside Group, which has an industrial coatings and composites business that makes precision components for clients such as Indian Motorcycles and Polaris, has seen prices shoot up for materials such as glass and resin.
The paradox is stark: At a time when many companies are generating some of their highest-ever sales, the money isn’t flowing to the bottom line. At Umbra, sales surged 40 per cent last year to roughly $200-million, and they’re up 82 per cent so far this year through May, according to Mr. Mandelbaum. Profit, however, is down 34 per cent as costs eat away at earnings.
“Our ability to withstand a less profitable year – although I haven’t quite accepted that yet – is part of being in business,” Mr. Mandelbaum says, adding this kind of disruption cannot continue indefinitely. “And I wouldn’t make short-term decisions that affect the long-term, like losing talented people or giving up on great products because of a short-term disruption… The point is that you hope for a better day.”
This Globe and Mail article was legally licensed by AdvisorStream.