The Supply Chain Ripple Effect

from cushman-wakefield.com | February 28, 2021

Bethany Clark is the Senior Managing Director of Strategy & Operations for Cushman & Wakefield’s Industrial Services group for the Americas. She provides strategic and operational oversight for the Industrial service line at C&W, supporting the performance of the company’s nearly 840 commercial real estate brokerage professionals in the U.S., Canada and Mexico. She authored the following article, which does a great job of explaining some of the current challenges that the furniture industry is up against.

It’s becoming clearer every day that the COVID-19 pandemic created one of the largest supply chain disruptions in history. It’s not just supplies of PPE, cleaning products, toilet paper and food that have been impacted—consumers are also having trouble finding things like recreation equipment, home fitness equipment, sewing machines, home improvement items, lumber, gardening supplies and outdoor furniture.

The pandemic and changing consumer behavior exposed weaknesses in supply chains, and as a result, we may see stock-outs and low inventories for months.

A Stone Cast into the Pond Last Winter…
Because retailers order goods far in advance of delivery dates—in many cases 6-8 months—orders for summer goods like swimsuits and coolers are placed in November and December. With the pandemic in China at its peak during the early months of the year, many manufacturers had to temporarily halt production. Some factories didn’t reopen until March, significantly delaying arrival of goods in the U.S. Here lies the beginning of the supply chain ripple effect.

Production delays and stalled deliveries add up to a significant challenge for supply chain operators. If goods needed in August aren’t already in the U.S. in June/July, or at least on the way to the domestic distribution network, they likely won’t be on store shelves in time. And seasonal surges such as back-to-school and the winter holidays could build more pressure on an already maxed out system, leaving many consumers struggling to find certain items. Add late deliveries to the mix—which could further exacerbate inventory challenges of handling out-of-season items that many retailers are already dealing with—and it’s not difficult to imagine the challenge taking months to unravel.

Symptoms of Supply Chain Strain
Impacts of supply chain disruptions surface in many different ways. The most obvious to consumers is food and household goods stock-outs. According to market-research firm IRI, 10% of packaged foods, beverages and household items were out of stock as of July 5, up from 5%-7% pre-pandemic.

For items like food and cleaning supplies, stock-outs are caused by a lack of packaging in some cases rather than the availability of the actual product. The high demand for soap and hand sanitizer, for example, has increased demand for hand pumps and dispensers—items typically made in China. The lead time to get pumps is usually five weeks, but it’s been reported that the current lead time is nearly six months.

Some manufacturers adjusted to increased demand for certain items by cutting the number of SKUs (stock keeping unit, refers to a single product identifier) in production. For example, Unilever reduced total product SKUs by 65% to increase production of cleaning products after seeing a nearly 600% spike in demand for some items.

A run on furniture and bulk home items like fitness equipment has caused lead time issues in those categories as well. In response to shelter-in-place orders back in March, many consumers sought to make their homes as comfortable as possible, but the increased demand has created extraordinarily long delivery schedules, in some cases, unreliable delivery dates. With some out-of-stock items, there is no indication of when a restock will occur.

Another symptom of supply chain strain is the limitation or complete disappearance of free shipping for select online retail orders. This is an effect of third-party logistics firms like UPS and FedEx electing to add special “peak” surcharges for single shipments or oversized goods, shipped from select high volume customers. Unprepared for the spike in eCommerce sales, logistics firms faced the kind of peak-level delivery needs they typically see during the winter holiday rush, and they added these surcharges to help manage the higher volume.

Resilient Industrial Real Estate Sector Remains in Growth Mode
Despite halted production and transportation bottlenecks, demand for logistics real estate has been resilient with the sector reaping the benefits of a widespread need for storage. According to Cushman & Wakefield’s Q2 MarketBeat, new leasing activity in logistics space accounted for 234.4 million square feet (msf) or 86.5% of all new leasing activity across all industrial property types for the first half of the year. Solid demand for warehousing and distribution space translated into nearly 100 msf of net occupancy growth through mid-year, which has made industrial the strongest performing commercial real estate asset class. Although the pace of recovery remains unclear, it is clear that industrial real estate will benefit from the need to hold more product and component inventories.