Three years ago at this time, thousands of retail doors across the U.S. were shuttered as COVID-19 began its rapid, deadly spread.

Factories in Bangladesh, Sri Lanka, Pakistan, Cambodia, Ethiopia and other global manufacturing hubs also shut their doors after large retailers and brands — facing deep uncertainty in their own businesses — canceled many billions of dollars’ worth of orders.

The two sets of closures are related, but the ultimate outcomes were vastly different and unequal.

Most retailers and brands in the U.S. shrugged off the financial impact of the store closures within a year. Meanwhile, many smaller factories closed for good, while workers were laid off and lost desperately needed income. Debt, forced labor and hunger followed the lost wages for many factory workers, especially in apparel and footwear, where incomes historically have been low to begin with.

The early period of the pandemic revealed the cracks in supply chains as well as the underlying dynamics that are still very present by many accounts, and which predated the crisis.

For all the talk of partnership between buyers and suppliers, the COVID-19 crisis showed just how contingent the relationship often is between powerful brands and overseas vendors and their workers, as research since that time has shown.

“It lays bare the vulnerability of the supply chain for the workers,” Pamela Abbott, a professor of education and director of the Centre for Global Development at the University of Aberdeen in Scotland, said in an interview.

‘They were just in shock’

Walmart. Target. Aldi. Kohl’s. Gap Inc. H&M. Inditex. VF Corp. Carter’s. J.C. Penney. Tesco. Those are just some of the companies that canceled orders with suppliers early in the pandemic crisis, according to academic researchers.

By late April of 2020, major brands had canceled $3.8 billion worth of apparel orders in Bangladesh alone, as Mark Anner, labor professor and director of the Center for Global Workers’ Rights at Penn State, found by using a database released at the time by a trade association of Bangladeshi manufacturers. And that was in just one country.

Some of the order cancellations were especially damaging financially. In many cases, suppliers had already spent capital to procure raw materials or had manufactured the products — some orders were even on boats in transit to their buyers.

“They were just in shock,” Anner said in an interview with Supply Chain Dive. “[Suppliers] were in debt, operating on credit, and getting paid later and later over time. … When you cancel on them, when they’re in debt to the banks and everyone else, the ripple effects are very severe.”

Force majeure — previously a boilerplate contract and legal term — took on new and dire meaning for suppliers. Literally meaning “a superior force,” buyers began invoking it to cancel orders en masse. Many suppliers were caught completely off guard. “‘Where is this clause?’” Anner said, describing supplier confusion at the time.

If the orders were already produced, suppliers were typically stuck with the goods. Garment factories in Bangladesh, for example, had to sell into local markets at much lower prices given that clothes for Western markets are very different from what people in those areas wear on a daily basis, as Muhammad Azizul Islam, chair in accounting and professor of sustainability accounting and transparency at the University of Aberdeen, noted in an interview.

And cancellations weren’t the only damaging actions by buyers. Brands also reduced new orders, delayed payments and started paying on longer terms as they tried to minimize their own risk. In effect, they shifted financial and operational risks to their suppliers, researchers and activists said.

About half of factories in a survey of Bangladeshi apparel producers reported that retailers engaged in at least one practice deemed unfair, whether it be order cancellation, price reduction, refusal to pay for dispatched goods and delayed payments, according to a paper from this January by Abbott, Islam and other University of Aberdeen researchers. Larger brands and retailers were more likely to engage in those practices compared to their smaller counterparts.

Debt, hunger and instability

Suppliers didn’t simply absorb all of the financial pain. As research has found, it moved further down the chain to workers. And many are still living with the ramifications today, three years later.

As store and factory doors shut, workers had their hours cut, or were furloughed or laid off.

The University of Aberdeen authors found that at least 25% of factory workers in Bangladesh lost their jobs during the March-April period in 2020, based on a survey with factory owners. The figure could be similar in other production areas around the globe.

Nearly 80% of garment workers who lost their pre-pandemic contracts had not received full severance pay, and more than two-thirds had received nothing, according to a 2021 report from University of Sheffield and Workers Rights Consortium researchers that surveyed over 1,110 workers.

Wage claims amounted to $24 million across 467 factories in six countries for Levi’s, Nike and VF Corp., according to a joint report from Asia Floor Wage Alliance and Global Labor Justice-International Labor Rights Forum.

That number covers only a small fraction of the supply chain. But if the average from that survey — $1.1 million in wage claims per factory — is any gauge, the unpaid pages owed to workers from the COVID-19 crisis would amount to many, many billions of dollars across the global supply chain just for the fashion industry.

The decimation of worker incomes had several consequences. Looking at workers in Ethiopia, Honduras, India and Myanmar, a team of researchers working with the WRC found that supply chain workers in the garment industry saw their living conditions worsen, as the few who had savings had to spend it to survive, and many more took on new debt. Along with borrowing costs, the nature of lending in many areas has made workers more vulnerable to forced labor and other abuses since 2020.

Workers also faced food insecurity and outright hunger. In a survey from November 2020, 88% of garment workers reported that their household had to reduce food consumption because of diminished income, and 77% said they or a family member had gone hungry at some point, according to a separate WRC study. Twenty percent of workers said they experienced hunger on a daily basis at the time.

Returning to factories after economies reopened in the West didn’t resolve the difficulties for workers. Islam said that employers pushed new contracts on those who had been laid off, and workers were desperate enough to sign even at less pay.

“Whatever the employer offered, you had to accept it,” Islam said.

When sales in wealthy countries picked back up and brands tried to restock in a hurry, schedules became frenetic, and many workers reported unpaid overtime.

Accelerated production schedules put even more pressure on those workers who still had jobs after the initial crisis. Many since have reported unpaid overtime. Those overtime wages are critical, as many workers in poor countries rely on them to make ends meet.

"Intensified production targets and all types of wage and hour violations that the garment industry is kind of known for has been heightened over the past years, because of the instability in supply chains and suppliers trying to make up for their margins on the backs of workers," said Sahiba Gill, senior staff attorney with GLJ-ILRF.

None of these ills for workers were new to the pandemic. Below-cost purchasing, rapid timelines, and last-minute order changes by buyers have pressured factories and in turn their employees.

“Workers weren’t very well off before COVID-19,” Abbott said. “COVID-19 just exacerbated pre-existing issues.”

A ‘character moment’ for buyers

After the initial crisis, many brands began paying for canceled orders. Anner pointed out that this was in part due to public pressure on brands, as they were called out for their actions in public.

Workers and suppliers began collaborating on activism, including through what was dubbed #PayUp, a campaign to pressure buyers to pay for canceled orders during the crisis.

As Anner wrote in a 2022 paper, collaboration between workers and factory owners on activism happened as “suppliers realized that they needed the moral legitimacy of activists and worker rights advocates, and because worker rights advocates understood that if suppliers went out of business, millions of workers would lose their jobs.”

Much of the visibility to the issue has passed with the initial crisis. And the cases of brands financing lost severance remain extremely small in number. One of the very few is Victoria’s Secret, which came to a historic settlement with workers in Thailand in early 2022 over wages lost amid a 2021 factory closure.

Again, that’s the exception for now. At the end of 2022, 90% of factories studied by the Asia Floor Wage Alliance had not resolved workers’ wage claims going back to 2020, and more than half had not paid for owed overtime also tracing back to 2020.

And that is after years of activist pressure on the brands in the study. One of those brands, Nike, was recently the subject of a complaint by unions and activist groups with Organisation for Economic Co-operation and Development over treatment of workers in the sportswear giant’s supply chain, much of it tracing back to the early 2020 period.

For Anner and others who study the relationships between buyers and suppliers in fashion and other markets, the crisis in 2020 highlighted just how unequal the partnership can be, and how workers in poorer countries ultimately absorb the brunt of buyers’ actions.

“Buyers squeezed suppliers on price, order volume and payment terms, with devastating consequences for suppliers and especially for workers,” Anner summed up in his 2022 paper. “Millions of workers lost wages, jobs and severance payments.”

The lasting impact is relational as well as material. “Partnerships and trust were severely damaged — between buyers and suppliers, and between factory owners and their workers,” Anner said in an interview. “That has to be rebuilt.”

It’s unclear what has changed in the relationship between large buyers and overseas suppliers. Among big brands, 72% were paying below the cost of production in late 2021, and 68% were buying from factories that were struggling to pay their workers the local minimum wage, according to the University of Aberdeen authors.

Some say the plight of workers in supply chains is just as precarious today, if not more so, and that buyers’ actions remain just as problematic.

“From what we've heard, I would say a lot of the buyers have not improved their relationships, and they've actually doubled down on some of their practices,” said one researcher who studies labor issues in supply chains.

For Abbott and Islam, the issues are systemic. As they explain, countries compete to be manufacturing hubs and attract foreign investment. Factories within those countries and in others all compete to win contracts. Buyers, facing investor pressure to generate profits, push down suppliers’ prices as far as they can. The rock-bottom prices and pressures on factories can lead to all manner of abuses against workers. And everyone in the system is competing to supply consumers vying for status and trying to keep up with cultural norms.

While the global supply chain crisis of 2021 showed just how much buyers rely on their suppliers, the following year saw buyers rolling back and canceling orders — albeit not with the same level of destructiveness as in early 2020 — once sales began to decline. But researchers Supply Chain Dive spoke with said workers are once again feeling the pain of buyers’ defensive actions.

"It is a real bellwether character moment for the industry, and they can still make good,” Gill said. “We're really hoping that they will find a way to pay back workers and their supply chain, and they can also change the way they do business moving forward.”

As consumer demand slows, the return of high-profile retailers in financial distress is a reminder of how vital trade credit is to the health and even viability of many store chains. It also shines a light on the financial threats of a flailing retailer to its suppliers.

But the question of whether to ship to a retailer in distress or even bankruptcy is rarely an easy one for suppliers.

When Party City filed for Chapter 11 last week, it owed critical domestic vendors more than $10 million for goods already shipped, and another $25 million to foreign vendors. The struggling party goods retailer had delayed payments as its liquidity waned. Suppliers had in turn shortened payment terms or started asking for cash on delivery, accelerating the retailer’s liquidity issues.

The story is typical of retail bankruptcies. No supplier wants their customer to fall into Chapter 11, yet tightened payment terms can accelerate a liquidity crisis.

“It could snowball,” said Dennis Cantalupo, CEO of Pulse Ratings, a credit analysis firm covering the retail space. “Suppliers are just responding to the retailer paying them slower.”

Cantalupo pointed to the case of Bed Bath & Beyond, which issued a warning earlier in January that it might have to file for bankruptcy if out-of-court restructuring efforts didn’t pan out.

“As a supplier, you're seeing, you’re hearing, and you’re reading in black and white that this company may be considering bankruptcy,” he said. “You have to take that threat seriously, and respond accordingly.”

Forecasting failure

Suppliers need to know the financial risks of selling to a retailer long before a bankruptcy is imminent.

“The first step is just simply doing the analysis,” Taylor Ricketts, AVP with Creditntell, said. “The second piece is also knowing your own situation, your challenges, communicating internally trying to figure out how long you have to mitigate.”

Albert Furst, chief operating officer of Creditntell, said that suppliers are always mulling the probabilities of a customer going bankrupt, and when, so that they can make decisions based on their own business.

“Are they risk averse? What are their margins? Do they have product that can't go anywhere else? What are the terms? Are they shorter or longer?” Furst said, describing the thought decision process of suppliers, which some may need to go through well in advance of the back-to-school or holiday season.

Retailers are well aware of the pressures facing their suppliers. In asking for emergency court authorization to pay its critical suppliers, Party City noted that some of its holiday product needed nearly a year of lead time for its vendors to develop, make and ship, and they often required payment far in advance.

Suppliers naturally want to ensure they’ll get paid. But cutting ties with a retailer or tightening up payment terms too early or too tightly comes with its own downside. Cantalupo noted that suppliers want to keep shipping merchandise as long as a retailer is not a short-term credit risk in their analysis.

“The way suppliers make money is to sell merchandise,” Cantalupo said. “So if they reduce a credit line, or stop selling into a retailer too soon, they can lose a lot of inventory turns that way.”

Suppliers have options to hedge their risks, including receivable puts and insurance, but those are added costs, and might not be offered once a retailer’s finances spiral past a certain point.

Selling into a bankruptcy

Once a retailer files for bankruptcy, the risks can be vast for some suppliers.

Anything owed on goods shipped within 20 days becomes an administrative claim in the case — known as a 503(b)(9) claim in the Bankruptcy Code — which means suppliers have to go through a court-regulated process with other creditors to get paid. Meanwhile, money for goods received by suppliers within 90 days of a bankruptcy filing could be reclaimed by the court if a supplier is deemed to have received preferential treatment in that payment.

Many retailers in bankruptcy want to pay back their suppliers quickly to maintain relationships, hence Party City’s emergency request within Chapter 11 to pay its critical suppliers.

Suppliers might even maintain trade credit for a bankrupt retailer, putting their confidence in the customer’s debtor-in-possession financing, which is meant to help fund companies through the Chapter 11 process. But it’s not without risk.

One stark illustration was the toy store giant Toys R Us, which filed for Chapter 11 in 2017 with plans to reorganize but ended up losing its financing after falling short of holiday targets.

An extensive list of toy makers and other suppliers who shipped to the retailer on terms collectively lost millions of dollars. But even that worst-case risk may be worth taking for suppliers that can absorb the losses.

Ricketts pointed to the Sears Holdings bankruptcy, which dragged on for years and forced suppliers to take a significant haircut when all was said and done. But if the margins were decent and suppliers kept selling to Sears through the several years of bankruptcy speculation, they still could have made a pile of money far outweighing what they lost in bankruptcy, Ricketts noted.

“It depends on your profit margins, it depends on a lot of things,” Ricketts said. “It comes back to how confident you are in the analysis.”

Ricketts also noted sometimes the credit department at a supplier gets overruled by the sales team. “The account could be that strategic, that important,” Ricketts said.

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Sustainability is a front-and-center issue for consumers and customers, who are leveraging their purchasing power to support companies that prioritize responsible environmental stewardship, ethical social practices and transparent corporate governance. In response, organizations are laser focused on building sustainable products, solutions and services. This often starts in the supply chain itself. Without an effective sustainability program within the sourcing and procurement and supply chain functions, the rest of the environmental, social and corporate governance (ESG) footprint can quickly disintegrate.

With the onslaught of natural disasters, pandemics, geopolitical conflicts and more, supply chain disruptions are growing in the face of global demand and increasing material scarcity, putting organizations at risk of financial loss that could reach millions of dollars each day. To maintain continued competitiveness, organizations must build a diversified and resilient supply base that embeds sustainability into business operations.

Sustainable operations require organizations to rethink how they function in order to uncover additional business value through their footprint. This is done by assessing, designing and implementing capabilities to improve processes; reduce emissions; optimize water, material and energy use; and support value-chain sustainability.

Sustainable sourcing requires a diversified supply base

A key element of sustainable operations is sustainable sourcing. In 2022, during the COVID-19 pandemic, the U.S. faced a severe shortage of baby formula products, with out-of-stock rates as high as 50% in some states. With formula production consolidated to just a few companies, the supply chain was impacted nationwide when top-producing facilities shut down. Companies that depended on these shuttered manufacturers to stock their shelves saw a direct impact on their bottom line as they were unable to maintain enough supply to meet customer demand.

For most organizations, 80% of their total spend is with their top 20% of suppliers – and conversely, only 20% of their total spend is with the remaining 80% of suppliers. To enable sustainable sourcing, organizations should create a diversified supply base that includes a range of businesses, from small- to medium-cap organizations to women-, veteran- and minority-owned businesses, etc., that are more agile and can easily pivot when needed, helping ease supply chain disruptions and ensuring they have the products their customers want, when they want to buy them. This ensures material availability and safeguards revenue and business continuity.

How to pivot to a new model of a trusted supplier network

Traditionally, organizations seeking to diversify their supply base first evaluated their needs within a certain category and then sought out diverse suppliers to meet those needs. Instead, organizations should pivot to a new model and ensure diverse suppliers are included in their strategy from the start. While not an exhaustive list, here are seven key steps to operationalizing sustainable sourcing:

1. Assess your existing supplier base to understand your current state
2. Conduct a benchmark and gap analysis
3. Create and prioritize a list of opportunities
4. Define those recommendations and opportunities
5. Craft an organizational future-state vision with leadership and gain buy in and support
6. Define key performance indicators to ensure a high return on investment
7. Implement and operationalize with people, process and technology

Organizations also should identify technology platforms that can assist with sustainable sourcing. These platforms can help determine suppliers within the supply base, their location, their capabilities, and more, and then can track multiple metrics, including greenhouse gas (GHG) emissions.

As our global population swells to more than eight billion people, scarcity and shortages are a real threat to the global supply chain. Organizations have a strong incentive to incorporate ESG considerations into their business strategy, operations and reporting, as they recognize the importance of sustainable operations in meeting customer expectations and building long-term trust and loyalty. Ensuring that sustainable operations are foundational to the operating model can play an important role in reducing the risk of resource scarcity.

A dynamic and efficient supply chain that incorporates redundancy and a more diversified supplier base enables organizations to employ agility, design out waste and promote sustainable consumption. This in turn promotes operational continuity and innovation, employee engagement, and supply chain resilience. It also can lead to improved sales and opportunities that create new revenue pathways, ensuring the organization can be sustainable for the long term.

Many of the constraints to supply that caused headaches in 2021 and into 2022 have eased, for reasons good and bad. (Good: Capacity rebounded. Bad: Demand slumped.)

But shortages haven't disappeared completely. Specific circumstances — from geopolitical and environmental turmoil to localized demand surges and more — are leading to stockouts of some goods.

“The macro conditions around Ukraine, climate [and] China are not changing significantly,” Simon Geale, EVP of procurement at the consultancy Proxima, said. “They're all dragging on.”

While the war in Ukraine has pressured commodities including some food staples, the continued concentration of production in China for numerous industries has also created a whole menu of risks that companies are still managing. China has rolled back its strict COVID-19 protocols and is grappling with a surge in case numbers, but the country could soon rebound economically and spark a new demand rush.

“While China is starting to open up, there's still a big backlog from the length of time they were shut down and turning things on and off again,” Ron Scalzo, senior managing director with FTI Consulting, said. “That's affecting everybody.”

Here’s a look at the goods that could give procurement officers a headache in the coming year.

Food

Last year’s invasion of Ukraine by Russia caused several commodities to spike in prices amid concerns about their supply.

Those troubles remain, though fears of disruptions to wheat have eased after Ukraine’s harvest was larger than expected. At the same time, environmental challenges elsewhere in the world are straining the supply of other important crops, including vegetables.

“The drought in California definitely had an impact on lettuce and tomato crops,” Scalzo said, noting also that recent floods in the state could have additional impact down the line.

Dole COO Johan Linden told analysts in November that the fresh fruit and vegetable producer was seeing “complete crop failure” in key commodities.

“This goes across the whole industry, where almost 30% to 40% of all the iceberg and romaine have failed and that is due to an extreme heat that we had in the beginning or late summer [and] beginning of the fall, followed by rain,” Linden said then.

Against that backdrop, buyers are managing inflated prices and tight supplies. Chick-fil-A, for instance, told customers that “some items may be unavailable or prepared differently” and Subway said it would temporarily use less lettuce in its sandwiches.

Eggs have also come under strain as avian flu has laid waste to flocks and driven up costs for farmers. Market prices per dozen eggs at the end of 2022 were up nearly fivefold from last January, according to USDA data. The term “eggflation” has, for better or worse, entered use.

“You can probably find eggs, but the prices have tripled in some cases,” Scalzo said.

Dine Brands Global CEO John Peyton complained in November that business expenses were falling more slowly at its IHOP chain compared to Applebee’s because “IHOP’s costs remain inflated due to the stubborn cost of eggs” as well as the war in Ukraine’s effect on grain prices, which feed into pancake batter.

Denny’s Corp. CFO Robert Verostek told analysts in August that commodity inflation had reached “unprecedented levels,” which included eggs along with pork, beef, dairy, poultry and other foods.

As often happens, tight supplies can translate into a boon for suppliers. In late December, Cal-Maine Foods, which calls itself the largest producer and distributor of fresh shell eggs in the U.S., logged a 110% spike in net sales and record profits, driven by highest-ever egg prices.

Lithium and other EV components

With electric vehicles seen as key to a global energy transition and decarbonization, demand has been on the rise for key commodities used in battery production and other green engineering components. The Inflation Reduction Act, which included incentives for EVs, is expected to raise demand yet further in the years to come.

Prices for lithium — a crucial material to making batteries — have soared with global consumption rising 33% in 2021 compared to 2020, according to the U.S. Geological Survey.

Lithium hydroxide prices were up 156% YoY in December, according to S&P Global Commodity Insights. The consultancy BCG noted in an August report that the price of lithium has increased ten times over in the past two years. High prices are likely to persist as chronic shortages loom, according to BCG.

“Costs are going up, demand is going up, supply is tight,” Geale said.

EV makers are feeling the pain. Tesla’s costs are likely to rise after a lithium supplier amended their agreement to peg the EV maker’s lithium costs to market prices, rather than at fixed prices as in their past agreement.

“[I]n electric vehicles, things like battery-grade lithium are still crazy expensive,” Tesla CEO Elon Musk said in October.

Supplies of other important materials for battery production are also under strain. Graphite, one of the primary components in the anodes of lithium ion batteries, has faced pressure as demand rises, with expanding shortfalls predicted over the next decade.

Shortage fears have also risen around cobalt, which was included in a Government Accountability Office report last year as a critical material for advanced technologies with high supply chain risks due to the U.S.’s reliance on imports.

Pharmaceuticals

“Tripledemic” is another recent addition to the lexicon, describing parallel spikes in various respiratory illnesses that hit the world’s population of children hard in 2022. The trend has pressured demand and supply for medicines common for children during the cold and flu season.

Stories abound of empty shelves and desperate parents. In December, drugstore giants CVS and Walgreens began limiting sales of over-the-counter children’s fever relievers including acetaminophen and ibuprofen. Walgreens said at the time that sales caps were meant to “prevent excess purchasing behavior” amid demand surges.

A form of amoxicillin used to make liquid doses for children also reached an “acute shortage,” according to the Food and Drug Administration in November. The agency said then that the supply shortfalls could “lead to potentially serious or life-threatening situations in particular in the pediatric population” as the respiratory illness season peaked.

The FDA has been working for more than a decade to combat pharmaceutical shortages. With many common medicines, the margins are thin, leaving little incentive for producers to build up excess capacity or stock.

In the case of amoxicillin, capacity is difficult and expensive to ramp up due to lack of flexibility in the equipment and processes used to make the drug.

“There’s not a short-term capacity answer for this,” John Gray, a professor of operations with Ohio State University’s Fisher College of Business, told Supply Chain Dive in December.

Also in short supply is the drug known by the brand name Adderall, used to treat attention deficit hyperactivity disorder, or ADHD. The FDA issued a shortage notice for the drug in October, noting that manufacturer Teva is “is experiencing ongoing intermittent manufacturing delays.” Supplies of other ADHD drugs are also reported to be under strain.

Semiconductors

The global chip micro shortage will enter its fourth year in 2023 after multiple disruptions stemming directly or indirectly from the pandemic.

Semiconductor constraints have caused headaches and delays for multiple industries. Supply is increasing for some chips, and 2023 could be the year when, finally, most of the industry stabilizes.

Reduced demand amid a global economic slowdown has lessened the pressure on supply. TSMC CEO C.C. Wei said in the company’s fourth-quarter earnings call, “As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level.”

Chokepoints remain, though. As Kazunari Kumakura, chief officer of Toyota Motor Corp’s purchasing group put it in November: “[I]n some semiconductors, the supply is getting better and in other semiconductors the chips remains in short supply.”

As with lithium, the U.S. government is trying to boost domestic chip production. In August, President Joe Biden signed legislation that included billions of dollars in subsidies to boost U.S. chip manufacturing with a 25% federal tax credit for companies investing in semiconductor production.

As long as single-family housing activity doesn’t take a deep dive, the U.S. could avoid further fallout as it transitions economically into a post-pandemic world.

That's according to Jason Miller, an associate professor and interim chair of Michigan State University’s Supply Chain Management Department, speaking during Supply Chain Dive’s July 11 virtual event “Supply Chain Outlook: Trends and Risks To Watch in 2023.”

He noted that the best-case scenario for the economy for the rest of 2023 would have new construction of single-family housing improve, possibly putting housing activity 10% to 15% higher than it was prior to COVID-19. The ability for consumers to pay for major expenses such as homes and cars as well as businesses’ capacity for significant projects can signal how the economy is doing amid federal interest policy shifts, panelists said.

But the country seems to be heading for a hard landing, Flexport Chief Economist Phil Levy also said as a panelist. He said it's unclear when that could happen, though.

He advised that businesses shouldn't overextend themselves, be ready to know if economic problems will occur and monitor if issues are happening sooner than expected. Watching the labor market and whether core inflationary measures are moving significantly downward or not are good signs to pay attention to, he added.

The Federal Reserve has sought to control inflation by raising interest rates and cutting its balance sheet since March 2022. Levy noted that a core Personal Consumption Expenditures inflation rate and a core Consumer Price Index — the CPI minus food and energy — have been hovering between 4.6% and 4.8% for months, but the Fed wants them to be 2%.

But if inflation remains stubbornly high, the Fed will continue to raise interest rates, putting a damper on demand, panelists said.

"Are they remaining stubbornly high?" Levy said. "In which case, buckle in."

Nothing for retail inventory planners has been easy over the past three years. After the shortages of 2020 and 2021, the industry spent the past year trying to unload products as consumers cut their spending in the face of steep inflation.

Although down from their peak, many inventory positions remain elevated for current sales levels.

“I've worked at multiple apparel retailers recently that have more inventory than I've ever seen,” said Matt Garfield, managing director with FTI Consulting. “It looks like you're walking into a peak season distribution center and we were in the middle of February, March.”

Even though the era of bare shelves is not far behind the industry, many are learning to live on leaner inventories and plan to chase products as needed in 2023 and beyond.

In doing so, retailers are prioritizing cost control and margin protection over the risk of lost sales.

“A little scarcity is not a bad thing,” said Joe Feldman, senior managing director with Telsey Advisory Group.

Inventory levels have peaked. But they’re still bloated.

Last June, Target issued a mid-quarter warning that its profits for the period were in for a significant hit as the retailer worked to “right-size its inventory for the balance of the year” amid a “rapidly changing environment.” The retailer blamed intense pressure on consumer spending from inflation on necessities, including food and gasoline.

Target led the way, but discretionary retailers, with few exceptions, spent the rest of the year trying to clear inventory. Analyzing retailers across major sectors, Telsey Advisory Group analysts found that, across segments, inventory growth averaged at 46% in Q2 2022. In apparel and e-commerce, that figure was considerably higher, at 65.6% for both sectors.

“Coming out of 2021, inventory was really lean, lower than it should have been, because you couldn't get goods and everybody was chasing,” Feldman said. “I think the miscalculation was the demand level.”

Retail inventories hit their peak in October, when they were up 18% from 2021 levels. Inventories have since fallen considerably but remain well above where they were three years ago, or even a year ago.

 

 

An improving supply chain has magnified the problem, at least on paper. By February, overall schedule reliability in ocean freight was up month-over-month by 7.7 percentage points and up year-over-year by a “staggering” 26 percentage points, according to DHL.

For consumer companies, that means goods have been shipping faster and arriving earlier than a year ago, which shows up in inventory levels. Apparel sellers such as Under Armour and PVH have noted this in their earnings. At PVH, which owns the Calvin Klein and Tommy Hilfiger brands, inventory was up 34% YoY at the end of Q4.

“We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times,” PVH CFO Zac Coughlin told analysts in March. “And in the fourth quarter this year, we experienced much earlier receipts of inventory as these supply chain and logistics disruptions had eased.”

Excess is costly up and down the supply chain

The inventory story played out differently for retailers and many of the brands that supplied them. As retailers moved to cut back their positions, wholesalers were often left sitting on excess stock.

“Wholesalers really got hammered,” Garfield said.

Apparel sellers GIII Apparel Group and VF Corp, for example, both cracked 100% inventory growth in 2022, according to Telsey Advisory Group analysis. Nike, one of the largest apparel brands in the world, hit 44% inventory growth in the period ending Aug. 31.

“If retailers have too much inventory, they're going to stop purchasing, or slow down their purchases, or push out their purchases from their vendors,” said Joel Wolitzer, SVP and business development officer with Rosenthal & Rosenthal, which provides factoring and other financing services. “We have seen that slowdown on multiple levels.”

For merchandise suppliers, life can be made tougher by the fact many retailers don’t place firm purchase orders, which means their vendors have to place informed speculative bets on how much a retailer will purchase, informed by a retailer’s projections. Even purchase orders can be changed or delayed.

Suppliers producing private label merchandise for retailers can be put in an especially tight spot if their buyer decides to pull back on their orders.

“Those goods can only go to that retailer. Suppliers can’t sell them anywhere else,” Wolitzer said. “So they’re kind of stuck.”

For larger wholesale brands, they may have ended up with higher inventory levels than their retail partners, but that’s not necessarily the worst-case scenario if they have their own sales channels.

“It's probably better for, say, Nike or Adidas to control the way they clear through the excess inventory,” Feldman said. The alternative, he added, is to “put it out there in the market and let the retailers decide what to do with it, and just cut price and potentially impact the brand.”

For all players in the market, inventory excess is costly. Additional warehousing can get expensive. As Wolitzer noted, if companies have to borrow to pay for that warehousing, then there are financing expenses such as interest as well.

Operational efficiency and capacity also declines once a certain amount of space in a warehouse is filled, Garfield noted.

"It's a very big impact to your overall profitability — your cost per pick, cost per unit, those kinds of core profitability measures that we look at for distribution,” he said.

Have retailers learned their lesson? And which lesson?

The past two years raise fundamental questions about how to buy and plan inventory, and can yield some contradictory answers. One of the biggest is: Is it worse to have too little inventory in boom times or too much in downturns?

“Two years ago, you just had to have inventory. If you had it, there was a buyer out there,” said Oliver Timsit, founder of the apparel brand Oliver Logan. “We’ve come to terms with the fact that we can’t have something for everyone.”

With supply chain problems easing, many of the same tensions that predated the pandemic are now coming back into play. While out-of-stocks could mean the opportunity cost of a lost sale, overstocks come with financial costs of storage and financing costs.

Inventory excess also comes with opportunity costs by tying up working capital, and, perhaps most importantly, means less space for fresh products.

“Much as we all thought that the retailers learned their lesson — that they're better off ordering less, chasing demand a little bit, and having very clean, profitable sales, meaning fewer markdowns — they all fell into that trap of: ‘Oh, if we just have more, we'll sell it,’” Feldman said. “And then they got caught.”

Should demand recover, Feldman thinks retailers will have an easier time chasing inventory than they did in 2021 given normalizing supply chains.

“Those bottlenecks are gone," Feldman said. "So if you do have much more normal ramping of production on the manufacturing side, getting it here shouldn't be too much of an issue, at least in the near term. I’m hopeful these guys will be smarter about it.”

Still, retailers are unlikely to ramp up purchase orders anytime soon — even if demand does come roaring back.

“I think it’s going to be awhile before merchants and executives are really ready to place that bet for a large inventory position,” Garfield said. “Those conversations were brutal last year. The earnings — they weren’t fun calls, and I don’t think anyone wants to go back to that time.”

Last year broke the crystal balls.

Some of the largest, most sophisticated companies in the world overbought or overproduced inventory by many millions of dollars in 2022. The reason, at its simplest, is that consumers did not behave as predicted.

Planners don’t have the luxury of blaming consumers for not acting according to their forecasts — especially when many of those customers were reacting to historic inflation in food, fuel and housing.

“Demand planning went out the door for three years,” said Rick Jordon, senior managing director with FTI Consulting. “Now they’re picking it back up, because they have all this excess inventory everywhere. And they’ve forgotten how to do it, or they didn’t do it well before.”

After three years of pandemic disruption and economic volatility, sharpening demand forecasts and inventory planning across industries seems both as imperative and challenging as it has ever been.

To get better results, companies are turning to new data sets and new technological tools like artificial intelligence to analyze them.

From spreadsheets to AI

An executive survey by McKinsey from early 2022 found that spreadsheets are still the primary planning tool for supply chain leaders, with 73% of respondents relying on them.

But, 43% said they planned to use artificial intelligence and machine learning for some planning activities. Another 17% said they planned to use AI and machine learning for most activities at some point.

A survey from BlueYonder, a supply chain software company, found that demand forecasting and inventory optimization are among the top uses of AI and machine learning technologies by supply chain executives

“We're moving well beyond Excel, and just moving to a more advanced tool set,” Ron Scalzo, senior managing director with FTI Consulting.

In Jordon’s view, AI technologies will at some point help remove human bias from forecasting and lead to more systematic predictions, as well as run multiple predictive scenarios at the same time.

Jordon noted that AI is needed to process through many data sets and help make sense of a company’s own internal data. “Most organizations have a lot of data,” Jordon said. “Are they using that to the best of their ability, utilizing the best technology and ignoring that noise? That’s really where the next three or four years of development will happen.”

Finding the right data to analyze the right way

At the most basic level, AI takes in data and spits out predictions. To get the best predictions, the data fed into them might matter even more than the AI tools themselves.

“There are systems pulling in data which is lying inside the company already, from across their enterprise systems, POS systems, the inventory levels from their stores and all that,” said Meher Dinesh Naroju, director of AI services at Centific. “There are very few companies that actually go outside of this box and get data from sources that are completely unstructured.”

Such data sources include things like social media, which can provide clues about burgeoning market trends. Customers are “actively engaging and leaving opinions and clues about various things they intend to do in the market or a specific category,” Naroju said.

Even images from a retailer’s store cameras might house data relevant to customer behavior in the aggregate, including reactions to certain products, brands and categories. “It’s a long shot, but it can help,” Naroju said.

Other sources, such as weather data, can provide early hints about supply chain timelines and inventory arrivals, he also noted.

Still, all of these data sets have to be put into the context of local and regional cultures and other marks of differentiation.

“It is of the utmost importance to pick and choose what data you need and very clearly segment the data you want to analyze,” Naroju said.

Once a company has the best, most refined and useful data it can get, that’s where AI tools become critical. The technology can derive insights from large pools of unstructured data that “no human being can do in so short a time,” Narajou said.

But even with the most creatively sourced data and advanced tools available, a prediction is still just a prediction.

“If you crack the code on a perfect forecast with the consumer today, you're quickly going to be the richest person in the world,” said Jake Self, vice president of operations for third-party warehousing and logistics company Smart Warehousing.

‘So much noise’

Businesses for generations have relied on the past to help them anticipate the future. That may seem outdated after the pandemic and then inflation scrambled the usual patterns, with volatile cycles piggy backing on each other since 2020.

But for many, historical trends are still the most useful forecasting data. “It’s not especially sexy, but we’ve actually philosophically been using the perspective that history is the best predictor of the future,” Destination XL Group CEO Harvey Kanter told Supply Chain Dive in an April interview.

“I think there's been so much noise in the last three-plus years that the roller coaster we’ve been on is almost impossible to predict,” he added. “I don’t know that the greatest level of AI and ML can predict what the consumer is going to do.”

Kanter went on to note that the apparel retailer still looks at pre-pandemic revenue and historical revenue contributions by day, week and month over the past 10 years, which he said has remained remarkably consistent.

Other businesses simply don’t have the budget to pay for or justify advanced technological tools. Smart Warehousing’s clients run the gamut from small brands operating out of their garages to Fortune 500 companies. For some of the smaller companies looking for replenishment and warehousing help, their forecasting process amounts to “hopes and dreams,” Self said.

For those companies, historical data is by leaps and bounds better than no data. “We've spent a lot of time on our replenishment program, really putting an algorithm in place that learns and understands based on historicals where we're going to need to be,” Self said.

Smart Warehousing can do that having invested in forecasting and replenishment technologies for more than two decades, and with an entire team of specialists dedicated to that one skill set. An algorithm for cold replenishment operations out of Missouri “looked like something out of Good Will Hunting,” Self, referring to the film that features actor Matt Damon playing an unknown mathematics prodigy.

But even with those resources, prediction is still tough in the current environment. “If you're not planning for an element of the unexpected, then you're probably not planning right,” Self said.

Canadian wildfire smoke continues to blow over much of the U.S., raising air pollution to harmful levels for construction workers. Now, the impact of the fires is likely to raise U.S. lumber prices, too.

Canada’s 2023 wildfire season has been blazing, burning the largest amount of land ever recorded in a single year, said Marcy Nicholson, senior editor at Forest Economic Advisors, a Littleton, Massachusetts-based wood and timber product database, in a report on the Canadian wildfires.

“Unusually warm and dry conditions in many parts of [Canada] have provided fuel for blazes,” said Nicholson. “This has forced thousands of residents to evacuate, caused a scattering of mills to close temporarily and altered some harvest plans.”

By late June, with several months of wildfire season left to go, the burned area has already exceeded the full-year record made in 1995, according to Canadian Interagency Forest Fire Centre data. Canada’s typical wildfire season peaks in July and fizzles out by October, added Nicholson.

That’s bad news for contractors dependent on lumber availability and affordability. The reason why is that Canada supplies approximately 80% of U.S softwood lumber imports, according to Natural Resources Canada, the Canadian government department responsible for natural resources.

“The enormity of the fires has given lumber prices a boost, though it is too soon to estimate how much of the affected area includes harvestable timber and how much will catch fire in the months to come,” said Nicholson. “It is also too early to know how much of this will need to be quickly salvaged. Some of the largest wildfires are far north, limiting firefighting efforts and opportunities to utilize the burned timber.”

Lumber prices fell 10% in the past year, according to the latest Associated Builders and Contractors producer price index. That provided much-needed relief for contractors, as lumber prices skyrocketed at the onset of the pandemic and remain 26.5% higher than in February 2020. 

After price drops for lumber in recent months, including a minimal 0.4% dip in June, economists expect that trajectory to reverse course again, said Mark Fergus, executive vice president of Cumming Group, a Seattle-based project management and cost consulting firm, in an email interview.

“Whilst the overall impact on resources is still being assessed, it is expected that the short-term impact of the wildfires will be to temporarily increase costs,” said Fergus. “The fires, combined with a drop in demand for residential properties resulting from current high costs, may result in a slight and temporary increase in lumber prices.”

Alberta and Quebec hardest hit

The Canadian provinces of Alberta in the west and Quebec in the east have been hardest hit thus far, with roughly 3.8 million acres and more than 3.5 million acres burnt, respectively, according to CIFFC data. Together, they represent more than 40% of Canada’s annual softwood lumber shipments. 

That’s a massive hit on Canada’s softwood lumber production, softwood lumber shipments and timber harvest volume, said David Logan, senior economist at the National Association of Home Builders.

Through the first three months of 2023, Alberta and Quebec accounted for a combined 44% of total shipments and 45% of total production, said Logan. That means wildfires in those provinces are affecting a meaningful chunk of Canada’s harvest.

“Alberta’s share of pretty much any metric related to softwood lumber has been growing rather quickly in recent years,” said Logan. “If Alberta can’t get back to the trend it was on — whether by natural disaster or public policy — it would bode poorly for lumber prices.”

With several months of wildfire season remaining, Natural Resources Canada forecasts weather conditions to get worse before they turn better with the approach of winter later in 2023. NRC expects fire weather severity in July and August will be above average for the vast majority of Canada, said Nicholson.

“Weather conditions in Canada are on track to fuel more wildfires throughout the summer,” said Nicholson. “It’s a jaw-dropping forecast that, at times, paints a huge amount of the Canadian map red.”
 

Flooding, hurricanes, record temperatures. Disruption from extreme weather is increasing as the world warms. 

In a landmark report from the International Panel on Climate Change, researchers found that over the next 20 years, global temperatures are projected to rise 1.5 degrees Celsius (2.7 degrees Fahrenheit). Such a rise will mean longer, hotter seasons, unprecedented sea level rise in coastal areas and more intense flooding, among other effects. 

Like many industries, manufacturing is contending with this new reality. It's warping the way factories operate, how employees work and where companies plan long-term investments. 

Extreme heat threatens productivity, worker safety

One of the primary threats facing manufacturers is the impact of extreme heat on productivity. As more workers become exposed to rising temperatures, the amount of work they can accomplish under such conditions is projected to drop, while threats to health go up.

The issue is tracked by the United Nations' Human Climate Horizons Project, published in partnership by the UN Development Programme and the Climate Impact Lab. The report projects how rising temperatures in the coming decades will impact productivity among workers around the world. 

One conclusion: Without intervention on global emissions, the average worker in the U.S. could lose 0.4 hours of productivity in annual hours worked between 2040 and 2059. 

The number may not seem dramatic on an individual scale, but it's a significant impact when multiplied across millions of people, said Hannah Hess, an associate director with Rhodium Group’s Energy & Climate practice and the Climate Impact Lab.

"Think of how your workforce responds when it's super hot outside. Here's how those days are going to multiply over the course of the century, Hess said. "And here's how that is also projected to have a larger and larger effect over time on your workforce."

The effects will extend across the globe, with some countries more affected than others. In India, if emissions are not cut by midcentury, the country is projected to experience 118 days a year over 35 degrees Celsius (95 degrees Fahrenheit). Such a rise would send hours worked plummeting by 19.6 hours each year as workers are exposed to extreme heat.

"What these results point to is that maybe there's a need in some places to think about investing in protected things like air conditioning or more breaks, water stations, as the world warms," Hess said. 

Rising waters could submerge global manufacturers

While extreme heat is a major emerging manufacturing risk as a result of climate change, it's not the only one. Increased exposure to flooding in facilities is another threat that manufacturers around the globe are increasingly facing. 

Flooding threatens huge swaths of the U.S. In June, an Abbott Laboratories factory, which was made infamous by its contamination of baby formula, was forced to pause production for weeks due to flooding in the facility following a storm. 

The issue is also impacting major manufacturing hubs in low-lying regions. In a study from Cornell University and the International Labour Organization, researchers found that contract manufacturers and suppliers in Southeast Asia are susceptible to extreme flooding and eventual submersion if their sites aren't moved to higher ground. 

The situation will be particularly dire for these companies, as many lack the same resources and infrastructure enjoyed by their multinational customers. 

"For buyers, the relative lack of attention to sea level impacts on suppliers and their workers underlines the nature of the relationships; buyers with very few exceptions do not own factories and risks such as catastrophic flooding belong to their suppliers," researchers wrote in the report. 

Research like the International Labour Organization's and the Horizon Project's can help guide federal policies around issues such as worker safety standards for extreme conditions, Hess said. 

"I would want a manufacturer to know that the effects of climate change are going to be much wider. Adapting is really important," Hess said. "But the fact that this is likely a conservative underestimate about the effects of climate change on the workforce just points to the importance of that flip side of the coin, which is mitigating and doing your part to reduce emissions."

Experts say the time to start tackling the risk is now

Threats from climate change are felt around the globe and from every variety of manufacturers.

The ubiquity of the risk is part of why experts say managing it will be a critical factor for companies' future planning strategies. It will impact both how they manage risk and their emissions, two issues that are inextricably tied together, said Thomas Kurfess, professor and HUSCO/Ramirez distinguished chair at Georgia Tech's George W. Woodruff School of Mechanical Engineering. 

The higher the global emissions, the more severe the disruption.

"I see two directions here. One is we are seeing more and more companies being more concerned about the environment in general," Kurfess said. "The other thing is from an economic perspective, floods and so forth, these things generate a lot of risk. So how do you deal with all the different risks involved?" 

UPS and the International Brotherhood of Teamsters have reached a tentative agreement on a new five-year national contract.

The Teamsters said in a July 25 announcement that the deal “raises wages for all workers, creates more full-time jobs, and includes dozens of workplace protections and improvements.” Its negotiating committee unanimously endorsed the agreement.

In the new tentative agreement, both full-time and part-time employees will see their hourly pay increase by $2.75 in 2023, according to the Teamsters. Over the length of the five-year contract, their pay will jump by $7.50 per hour.

“UPS has put $30 billion in new money on the table as a direct result of these negotiations,” Teamsters General President Sean O’Brien said in a statement. “We’ve changed the game, battling it out day and night to make sure our members won an agreement that pays strong wages, rewards their labor, and doesn’t require a single concession.”

The tentative deal is a welcome development for the shippers relying on the roughly 330,000 Teamsters-represented UPS employees to deliver millions of packages every day. Concerns of a strike starting Aug. 1 escalated in recent weeks as the two sides struggled to reach an agreement on economic topics like pay and benefits.

“Together we reached a win-win-win agreement on the issues that are important to Teamsters leadership, our employees and to UPS and our customers,” said Carol Tomé, UPS CEO, in a statement. “This agreement continues to reward UPS’s full- and part-time employees with industry-leading pay and benefits while retaining the flexibility we need to stay competitive, serve our customers and keep our business strong.”

The handshake agreement is a major step toward UPS averting a work stoppage, but the bargaining process isn’t over yet.

Next, the union will present the agreement to UPS employees they represent for review and voting. Their membership is able to vote on the national master agreement and regional supplemental contracts that cover their employment, according to UPS. To be ratified and implemented, each agreement — from the national master contract deal to supplementals — requires a majority to vote “yes.”

Representatives of UPS Teamsters locals will meet on July 31 to review and recommend the agreement, according to the union. Voting among union members runs from Aug. 3 to Aug. 22.

Negotiations stalled, then restarted

The tentative agreement comes after the Teamsters began pushing UPS for more favorable terms on economic items in late June. O’Brien said a strike appeared “inevitable” and the union repeatedly called on the company to present its best and final offer.

While UPS’ June 30 offer didn’t meet all the Teamsters demands, there was enough movement on the company’s side for the union to reengage in negotiations.

The two sides made quick progress in talks shortly after that. They reached tentative agreements on three major economic topics on July 1, including the elimination of the “22.4” combination class of drivers. The union has said this separate classification created two unequal employee tiers.

But then, a significant roadblock emerged in differences over part-time employee wages. The Teamsters alleged UPS walked away from the bargaining table on the early morning of July 5, while the company said the union refused to negotiate further.

Negotiators returned to contract discussions on July 25, and they reached a deal on remaining topics, including part-time pay. The new deal, if ratified, will increase the average total wage for existing part-time workers by 48% over the next five years, according to the Teamsters.

The next step is for the tentative agreement to be ratified by union membership. Although Teamsters negotiators liked the deal enough to present it to the rank-and-file, contract ratification in general is “extremely difficult these days,” said Art Wheaton, director of labor studies at Cornell University’s School of Industrial and Labor Relations, in a recent interview. For example, pilots at UPS rival FedEx rejected a tentative contract on July 24, sending negotiators back to the bargaining table.

Health and safety risks endured during the pandemic's heyday and more recent inflationary pressures have union members calling for deals that reflect their sacrifices and the current economic environment, Wheaton said.

"You've seen the cost of living skyrocket for a lot of different people, and if the contract language doesn't give them a huge raise, they will say, 'Well, why did you agree to this? You need to give us more money,'" Wheaton said.

UPS will have trouble passing off higher labor costs to customers via shipping rate increases as delivery demand has waned, experts have told Supply Chain Dive. But Tommy Storch, a transportation procurement expert at Insight Sourcing Group, said in emailed remarks that the agreement is poised to have a big impact on the company's pricing.

“Last year, UPS implemented a general rate increase of 6.9%, which was a full percentage point above the typical 4.9% to 5.9% increases," Storch said. "Considering the additional compensation for workers, we should anticipate a rise of at least 8% following this new contract, when factoring in accessorial and fuel increases as well."

Retail groups express relief over deal

Experts expected a strike would cause significant disruptions for a wide range of industries reliant on parcel carriers to make deliveries, given UPS' outsized presence in the space. The retail industry was seen as particularly vulnerable, especially as e-commerce demand has grown.

“News of a tentative UPS-Teamsters contract agreement is an enormous relief to retailers, who have been navigating the possibility of a strike and the associated uncertainty for weeks," the Retail Industry Leaders Association said in a statement. "With a work stoppage now taken out of the equation, retail supply chains can continue firing on all cylinders to deliver for consumers across the country."

National Retail Federation President and CEO Matthew Shay expressed a similar sentiment in his own statement. He said the timing of the tentative agreement is critical as the peak back-to-school shopping season kicks into gear.

"Retailers rely on stability within their supply chains, and this agreement will bring long-term stability, as well as assurance to the millions of businesses and employees who rely on smooth and efficient last-mile delivery," Shay said.

The looming threat of a UPS strike hasn't been enough for many companies to shift some of their package volumes elsewhere.

The delivery giant's national contract agreement with the International Brotherhood of Teamsters, which represents around 330,000 UPS employees, expires at the end of the month. The union plans to strike Aug. 1 without a tentative deal for a new contract in place, which would hobble the company's network and spur supply chain disruptions.

But even with this risk and the growing popularity of carrier diversification, some shippers have maintained their current volume levels with UPS, according to parcel delivery experts. A company's size, current carrier mix and confidence in negotiators to reach a deal all play a part in that decision, in addition to the nuances of their particular shipping contract.

That's not to say all shippers are unmoved by the strike threat. With the contract expiration date fast approaching, there are still companies scrambling to implement alternative carriers.

"What I've seen here in the last month or so is the tone has changed," Stephen Beard, VP of transportation at e-commerce fulfillment provider PFS, told Supply Chain Dive. "Now I've got all of these clients wanting to talk to us about how they can move volume away from UPS."

Here's why some UPS shippers are holding steady, even as others ramp up their mitigation plans.

The benefits to sticking with UPS

AFS Logistics, a 3PL, hasn't seen any significant shifts in their customers' volume away from UPS. There is a blend of reasons why this has been the case, said Micheal McDonagh, AFS Logistics' president of parcel.

Several shippers are simply confident a deal between the company and the Teamsters will be reached before a strike could occur. Larger-scale clients also may be concerned about losing volume-based shipping discounts, which can be noticeable even with just a week or two of diversions, and complexities involved with adjusting their carrier mix.

"You're talking about testing your system, testing the routes, testing the pickup times and training your staff for a change that may not happen," McDonagh said.

Additionally, strict contract language can disincentivize shippers from diverting their packages to other carriers.

PFS' Beard has seen shippers locked into deals that come with a large financial penalty if they don't provide the carrier with the agreed-upon volume level for the year. These sorts of arrangements became more common after capacity constraints driven by heightened delivery demand during the COVID-19 pandemic.

"For three years it was like, 'Can I just get my stuff picked up at any price?'" Beard said. "During that time period, the carriers took advantage of that leverage. They were able to insert clauses in contracts that never got done before, and I think that is creating some of this stickiness right now."

Small- and medium-sized businesses are particularly vulnerable to strike-related disruptions, experts say, as they don't have the volume or purchasing power to secure capacity from alternative carriers as easily. Many remain single-sourced with a national carrier like UPS.

UPS has also worked hard to retain business amid cooling delivery demand, assigning executives to its major customers in order to sway them to keep their packages in its network. The company's tactic appears to have helped, as rival FedEx didn't see any material benefit from the contract negotiations in its most recently reported quarter.

These factors have resulted in a range of companies vulnerable to a UPS strike, if it does happen.

Williams-Sonoma and headphones company Koss Corporation have flagged the unsettled contract negotiations as a risk to their operations in securities filings in 2023. Nicokick, a tobacco-free nicotine product seller that uses various UPS shipping services, warned on its website that customers should consider placing their next orders soon to avoid potential delays.

"Orders shipped before July 31st will most likely be unaffected," Nicokick said.

Other shippers work on contingency plans

Other firms have already laid the groundwork to mitigate the impacts of a UPS strike.

In emails to Supply Chain Dive, major UPS customers Amazon — which has grown its own delivery fleet — and Macy's expressed confidence they can minimize any disruptions that would come from a work stoppage at the delivery firm.

“At Macy’s, our experienced teams have successfully navigated through supply chain disruptions in the past and are confident in their ability to flex and pivot as needed," said a spokesperson for the retailer. "In the event of a strike, we have contingency plans in place to mitigate any impact to our customers.”

Experts say a key component of contingency planning is securing capacity at alternative carriers. Shippers have diversified their carrier mixes beyond the likes of UPS since the capacity constraints of 2020 and 2021.

For example, AxleHire has seen existing clients move UPS-destined volume to the urban last-mile delivery provider to mitigate potential disruptions, COO Adam Bryant said. The company isn't expecting any additional volume diversions from those customers, and it plans to serve new clients on a first-come, first-serve basis using its network of gig drivers.

"One advantage that we do have is the fact that we are a very asset-light model," Bryant said. "By leveraging the gig economy and some of these partners, we've been able to flex up."

Leveraging a diverse mix of delivery companies is a critical wrinkle in PFS' plan to mitigate the impact a strike would have on its clients, many of which ship lightweight products such as luxury goods and makeup, Beard said.

For items weighing more than four pounds, the fulfillment provider will rely on FedEx. Products below that threshold will typically be handled by U.S. Postal Service workshare partners. These partners, such as OSM, inject volume into the agency's network closer to the delivery destination and bypass potential choke points at larger Postal Service sorting facilities.

"It's more flexible than the integrated carriers’ networks are going to be," Beard said.

Yellow Corp., the third-largest U.S. LTL carrier and the largest union employer in the sector, ceased operations as of July 30 at noon EDT, according to notices posted for customers and employees.

“For customer-related concerns please call 800-160-6500,” the notices said.

The trucking company also added a service alert to its website with an online form for customers with questions or concerns.

The International Brotherhood of Teamsters, which has 22,000 members at the company, said July 30 it had been served legal notice Yellow is filing for bankruptcy. A spokesperson for Yellow declined to comment that day.

It’s the end of a long road for the 99-year-old carrier, founded in Oklahoma City, which employed another 8,000 non-union employees.

The company, which came close to folding four other times since the Great Recession, received a $700 million bailout from the U.S. Treasury three years ago. But it has blamed its financial troubles on its nine-month battle with the union over labor provisions of its One Yellow network overhaul.

The back-and-forth culminated in the Nashville-based carrier filing a $137 million lawsuit against the Teamsters, accusing the union of “unjustifiably blocking” its plan to combine its four operating companies, YRC Freight, New Penn, Holland and Reddaway.

Yellow’s woes worsened when the cash-strapped company did not make pension and benefit payments for June, prompting a strike threat by the union that caused customers to began fleeing en masse in the last few weeks.

The union narrowly averted a strike in the 11th hour, working out a deal to allow the company to defer the pension payments. But the accelerating freight diversions had already taken their toll. The carrier put up its brokerage for sale in late July as it stopped picking up customers’ new freight.

“Today’s news is unfortunate but not surprising,” Teamsters General President Sean O’Brien said in a statement Sunday.

He further criticized Yellow management, saying the company has shown it could not manage itself despite billions of dollars in worker concessions and hundreds of millions in bailout funding from the federal government.

“This is a sad day for workers and the American freight industry,” O’Brien said.

With a tentative contract agreement in hand, the International Longshore and Warehouse Union is now focused on presenting the deal to members and following a months-long ratification process.

The union and the Pacific Maritime Association said June 14 they had reached a deal that both recognizes workers’ efforts during the pandemic, but keeps port operating, according to a joint statement.

“While the final decision is up to our members, we feel our time at the bargaining table was well spent and that the agreement represents the hard work of our rank and file and the sacrifices they made during the pandemic,” ILWU President Willie Adams said in a June 15 statement.

Adams said the union will not publicly release details of the deal until after the ratification process is complete, which could take months. He proceeded to go into detail about the process.

The ratification process starts with a “contract caucus that convenes delegates from our 29 locals up and down the West Coast,” Adams said. “These delegates will carefully review the tentative agreement and make a recommendation to the rank and file who will then vote on the tentative agreement.”

The union represents 22,000 workers at West Coast ports. The union and its employer counterpart said in their joint statement Wednesday that the new contract will cover a six-year term.

Herculean efforts to keep cargo moving over the past few years have left a big imprint on U.S. cargo flows, port and real estate data show.

Shippers, seeking reliability in their supply chains since the onset of the COVID-19 pandemic, have taken major steps to reconfigure their logistics networks. Many diverted cargo over the years, fleeing congestion at large gateways or the risk of labor disruptions at West Coast ports. Others are simply moving closer to their customers, using ports and opening facilities near fast-growing population hubs to lower logistics costs.

Dozens of ports nationwide benefited from this combination of trends. But where exactly did the cargo go? And will the trends stick? Curious for answers, we asked a few analysts and examined data to find out.

Here's what we learned.

1. A rising tide lifts all ports

An import surge during the pandemic led many ports across the United States to notch record annual volumes.

By the end of 2021, the country's top 10 containerports had handled 6.8 million more TEUs than in 2019, according to data collected by Supply Chain Dive. The volume growth was twice as large as what ports had seen the preceding two years, when combined volumes had grown by 2.8 million TEUs from 2017 to 2019.

However, growth among the top 10 ports was not split evenly during the pandemic import surge, as shown below.

Georgia provides one example of how a fast-growing region can affect port volumes. The state’s manufacturing base, low real estate costs, and convenient location for carriers have helped make it a logistics hub, Griffith Lynch, executive director at the Georgia Ports Authority, told Supply Chain Dive.

“Our location is central to the Southeast, we’re the closest port to a major metropolitan area in Atlanta. We have incredible rail connectivity throughout not only the Southeast, but into the Midwest,” Lynch said.

James Breeze, CBRE’s vice president and global head of industrial and logistics research, told Supply Chain Dive many markets in the southeastern U.S. are benefiting from similar trends, where population and economic growth are driving imports.

“You want to be close to that,” said Breeze. “You want to try to save on transportation costs. It's extremely expensive to import everything into Los Angeles, and then trucking it across all the way across the country.”

2. Small ports see big gains

Along with greater volumes, the pandemic-driven rise in imports also brought shippers a big problem: congestion.

Prevalent delays at the nation’s top containerports, which handle over 80% of all U.S. volumes, forced shippers and carriers alike to get creative. Shipping lines altered schedules, while some cargo owners chartered ships. As congestion wore on, many companies also turned to small gateways that were a truck drive away from major ports.

By the start of 2022, for example, FedEx Logistics had started what it called a “congestion bypass service,” selling space on empty containers being shipped to the Port of Hueneme, north of Los Angeles, to shippers looking to avoid delays at the San Pedro Bay ports.

The list of fastest growing seaports and related real estate markets in 2022, mapped below, show how other small gateways like Port Freeport, which is south of Houston, and Philadelphia’s port on the East Coast also won big from cargo shifts.

3. Longshore contract talks affect West Coast volumes

Even as congestion and demand subsided in 2022, cargo diversions did not slow down as many shippers feared another risk on the horizon: potential disruption from West Coast longshore contract talks, which began last May.

Dozens of business groups acknowledged the trend early in 2023, saying in a letter to the president cargo would not return to the West Coast until a deal was acknowledged. The trend, combined with the effects of congestion and general demand shifts, contributed to the gains at ports on other coasts.

But how much of those gains came at the expense of West Coast ports?

More than one million TEUs each year since 2021, according to an analysis from Descartes, and most of that cargo went to Gulf Coast ports. The supply chain solutions firm also found specific commodity groups — electronics, furniture and machinery — made up a large amount of the diverted cargo.

“We would really say [Gulf Coast ports] were the big winner,” said Chris Jones, executive vice president of industry and services at Descartes. “They weren’t used to handling that kind of volume.”

4. Cargo shifts shake up ports’ market share

The confluence of trends over the past three years dramatically affected cargo flows, reshaping the market share of the United States’ top ports along the way.

Some ports shot up in the ranks, including the ports in Houston and South Carolina, which rose in importance as they gained volumes. So, too, did the Port of New York and New Jersey, which became the nation’s second largest port by annual container volume in 2022, after seeing its volumes rise by 2 million TEUs since 2019.

West Coast ports, on the flip side, largely lost market share.

The ports in Seattle and Tacoma, represented by the Northwest Seaport Alliance, and the Port of Oakland were among the few ports that had lost volume in 2022, compared to 2019. And while the ports of Los Angeles and Long Beach gained volume, other ports’ gains chipped away at their combined market share.

Will cargo return?

Because the ports of Los Angeles and Long Beach are among the largest in the country, several analysts predicted the San Pedro Bay ports may gain back some of the volumes they lost over time.

“It’s not easy to shift trade lanes,” Descartes’ Jones said. A shipper’s ability to divert cargo depends on sailing schedules and inland transportation, such as intermodal capacity, as much as on the chosen ports. And since many shippers had their supply chains built from west to east, he said there’s some inertia to “flipping the switch.”

“Some percentage is certainly going to come back,” Jones said. “The part we’re going to watch is what percentage of that is actually going to come back. And it won’t just happen overnight.”

Similarly, CBRE’s Breeze said the Los Angeles and Long Beach ports will continue to play a vital role in U.S. supply chains.

The twin ports together handled 35% of all imports sent to the top twelve U.S. ports despite volume losses in 2022, according to data collected by Supply Chain Dive. And Breeze noted the two ports are still the closest and fastest gateway to bring goods from Asia to fast-growing markets like the U.S. Southwest.

“We're not seeing occupiers move out of Los Angeles and then move into Savannah,” said Breeze. “What they need to do now is keep that space in Los Angeles, but also add a second space in Savannah. That's part of what we call supply chain resiliency.”

Matthew Burgess, vice president of Global Ocean Services at C.H. Robinson, said shippers moving high-value or time-sensitive cargo would be the most likely to return volumes to Los Angeles and Long Beach, once the risk of contract-related disruptions at West Coast ports subsides.

But he also predicted some diversions may be permanent, particularly for shippers who prioritize cost or whose goods are not time-sensitive.

“Overall it does remain cheaper, especially if they're shipping sort of east of the Mississippi," Burgess said.