Decision Vision Episode 163: Should I Increase Inventory? – An Interview with Jason Haith, OEC Group, Louisville
Many businesses are wrestling with the question of whether they should build up inventory to counter delivery delays due to supply chain disruption. In this interview with host Mike Blake, Jason Haith of the OEC Group contends that while those supply chain challenges have abated somewhat, they have not been solved, and may become even more challenging. Jason discussed many of the issues at hand, what may be coming later in 2022, what solutions may be available, diversifying shipping and sourcing, and much more. Decision Vision is presented by Brady Ware & Company and produced by the North Fulton studio of Business RadioX®.
Founded in 1981, OEC Group had a vision to provide comprehensive logistics services to clients.
Today OEC Group serves destinations throughout the world and has grown into one of the leading logistics providers from Asia to North America.
Their annual cargo volume has consistently put us in the top position for Transpacific Trade.
With offices in over fifty countries, they take pride in being close to your cargo at all times.
Proximity of their OEC logistics professionals to your cargo enables them to stay on top of relevant market trade intelligence. Their Asia offices bridge the connection between you and your supplier, bringing additional insight to the entirety of your supply chain.
Jason Haith, Manager, OEC Group, Louisville
OEC Group is an incredibly dynamic International Logistics company specializing in the Asia and West Asia trade. OEC offers Full container, LCL, Airfreight, warehousing, and Customs Compliance services.
Jason is the manager of the office in Louisville, Kentucky and has been with OEC since 2011.
Jason has a degree from The University of Kansas. He lives in Louisville.
Mike Blake, Brady Ware & Company
Michael Blake is the host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms, and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth-minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision-maker for a small business, we’d love to hear from you. Contact us at firstname.lastname@example.org and make sure to listen to every Thursday to the Decision Vision podcast.
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Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we discuss the process of decision-making in a different topic from the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:41] My name is Mike Blake, and I’m your host for today’s program. This program is sponsored by Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. I am managing partner of the Strategic Valuation and Advisory Services Practice, which brings clarity to clients facing critical strategic decisions by presenting clients with empirical facts that enable great decision making.
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Mike Blake: [00:01:32] Today’s topic is, should I increase my inventory holdings, and, specifically inventory holdings coming from abroad? During the pandemic, according to the US Census Bureau Data, US businesses on average have 37 days of inventory in hand. That is the lowest since the 2009 recession and is still trending lower. So, we all know that there are supply chain issues whether you had a hard time getting a Peloton during COVID and now they can’t give them away. It’s taking four or five weeks to get a brand new MacBook Pro. We’re routinely seeing products that we’re used to seeing on the shelves. We’re seeing empty shelves from everything – everything from steak to corned beef hash to oyster crackers. And, of course, remember in the early days when there were massive shortages of disinfectant wipes, disinfectant sprays, the great toilet paper craze of 2020, and the list goes on and on.
Mike Blake: [00:02:39] And, we are told that the reason or a reason that we’re seeing, the inflation that we’re seeing of late, is because the supply chain has yet to recover. And, that appears to be true. And from a consumer’s perspective, of course, it’s irritating. It’s disappointing. And, in some cases where inflation is really hitting, it’s potentially existential. But, of course, this is a show that is aimed at business decision-makers and this is impacting many businesses that are simply running out of product. And running out of product is a bigger deal than you might imagine, at least in some cases. Our guest will talk more about this, I’m sure.
Mike Blake: [00:03:31] But, you know, I think about – it wasn’t that long ago when you could walk into a Home Depot and you could buy Halloween or Christmas decorations on Christmas Eve and they would still have fully stocked shelves. Right. And then, if you wanted to, you could wait a few days later, they’d be selling everything off at $0.30 on the dollar or something. Now, if you’re not stocked up on that stuff by December 15th, that’s already out of there because companies have really tightened up their inventory management practices and they have decided in some cases that they’d rather miss out on a sale rather than being left holding the bag on inventory that they can’t move or going to have to take a bath on.
Mike Blake: [00:04:16] But we’re seeing now the exposure that that creates just in time inventory is fantastic when everything is working the way that it’s supposed to. But it’s vulnerable to one thing not working as well. One bottleneck will have ripple effects throughout the entire supply chain. And then, if you have ten bottlenecks as is the case or more in some of our supply chain, well, you see what we have. Right. And so, you lead to stockouts, which lead to disappointed customers. And if you’re dealing with online retail, I understand that one of the things that can just kill your rankings is if you’re just out of inventory. And that’s really hurting a lot of electronic retailers.
Mike Blake: [00:05:03] And so, this is an important decision, I’m sorry, an important conversation that is leading to a decision about whether or not companies need to change their inventory practices. Some probably have. Others are probably thinking about it very hard. If so, how to do that now? I’m not an inventory guy. I’m not a supply chain guy. I’m a finance guy through and through. So, I have told you the sum total of everything I know about the topic. So, we’ve brought in a guest who knows a heck of a lot more about the topic.
Mike Blake: [00:05:32] And joining us today is Jason Haith, who is the branch manager for OEC Group, Louisville. He’s been with OEC for 16 years, handling full container import-export, less-than-container consolidations, including buyer consolidation, airfreight import-export, along with consulting with clients and documentation. Founded in 1981, OEC had the vision to provide comprehensive logistics services to clients. They serve destinations throughout the world, and has grown into one of the leading logistics providers from Asia to North America. Jason, welcome to the program.
Jason Haith: [00:06:04] Mike, thanks so much for having me.
Mike Blake: [00:06:07] So, I’ve tried to, in a very ham-handed way, set the table here. We’ve been told for a long time excess inventory is bad. It consumes cash. It promotes inefficiency, among other things. Now, all of a sudden, we’re finding ourselves lacking in inventory. Why would companies want to go back the other way right now?
Jason Haith: [00:06:35] In terms of adding additional inventory, you mean?
Mike Blake: [00:06:37] Yes, that’s right.
Jason Haith: [00:06:38] So, I think a lot of what you’d said in your introduction is accurate. I think one of the biggest challenges the import community has faced isn’t just the cost of product in particular or shipping. It’s the uncertainty of transit time. Those issues have abated some as we’ve come out of Chinese New Year this year. But there is an issue that’s looming on the horizon that importers are really going to have to start taking a look at. And that’s the contract, the labor contract renegotiations on the West Coast. That contract is up this year, July 1st, and the possibility of a labor disruption or a full-on strike is likely enough that it’s forced conversations with clients to provide alternatives.
Jason Haith: [00:07:34] The ILWU, the International Longshore and Warehouse Association, effectively controls all of the freight terminals, and these are the terminals that [inaudible] actual vessels come into to be unloaded at the ports. They are the men and women that operate the cranes and move containers around the port facility. That contract is due July 1. And if they’re unable to reach an agreement, the possibility of a labor disruption is likely.
Jason Haith: [00:08:08] That poses a number of problems for the community. The first is that the West Coast of the United States is responsible for something around 60% of all of the volume that’s coming into the country. So, if those gateways effectively go down or inoperable, it places a huge amount of pressure on the remaining ports that are still operable. That would be the Gulf Coast, primarily Houston; the East Coast, primarily Savannah, Norfolk, and New York I think at this point. Those facilities are much smaller. They’re much smaller facilities and just not really capable of handling the volumes that are going to be coming their way. I think it’s going to be tough.
Mike Blake: [00:08:59] Now, leading up to this, there’s been an obsession, I think, or at least certainly a lot of focus on not carrying excess inventory. So, let’s go back to sort of inventory supply chain 101. How did we get to that point? Why did – why have people – why do people decide they wanted to carry as little inventory as possible? Why did we expose ourselves to this risk now?
Jason Haith: [00:09:24] I mean, ironically, I think it was because of the fluidity of the supply chain. Several years ago companies were easily able to operate in that JIT sort of scenario because product was – and product production and the transportation of that product was efficient enough that it allowed companies to sort of build these foundational pillars and how they’re going to operate moving forward. It’s those foundational pillars, I think, that have been shaken by what we saw in 2021.
Jason Haith: [00:09:59] In terms of inefficiency and excess cost, I think importers were looking at what was happening on the sales side and thinking to themselves, “Oh, my gosh, I don’t have – based on the way sales are now, I’m not sure I have the product that I’m going to need in the future. Let’s get more product moving.” And, the difficulties that I think importers saw in 2021 are really leading them to pursue a different course of action up to and including carrying inventory now that they may not have previously just because they’re unsure, not just from a transportation perspective. Transportation is incredibly inefficient. But that’s just one portion of it.
Jason Haith: [00:10:47] On the production side, there are issues as well. COVID lockdowns in China continue. Suppliers in China continue to have issues with inflation and increased product costs. The shipping delays have left product at supplier facilities longer than expected. In some cases, suppliers have had to either slow production or cancel it altogether not because they don’t have the raw materials to produce it, but because once it’s produced, they physically have no other, nowhere to put the product. Their warehouses are so stuffed full of product that was supposed to ship that didn’t that it’s hampering production. So the importers are really in a tough spot because they’re seeing these issues from literally all sides.
Mike Blake: [00:11:39] So, speaking as a citizen now and here as a consumer, I think we are under the hope that supply chain would have been kind of fixed by now or figured out by now. And clearly, it’s not. If anything, I don’t know if it’s worse or not, but it’s clearly not the way we’re used to seeing it. Why are there supply chain challenges? Is it still just on the raw production side where companies are having trouble just getting people in to do the work? Or, is it more on the distribution side? Or is it everywhere throughout?
Jason Haith: [00:12:16] I would say, to answer your question directly, it’s everywhere throughout. I think the initial problem began and is directly related to COVID. Specifically, the first three months of 2020, China was shut down. They were all locked down and US importers couldn’t really get much production because there wasn’t anyone working. And just as China starts to come out of those lockdowns, the US goes under lockdown. And so, US importers are, again, unsure. Should I bring product in or not?
Jason Haith: [00:12:49] When the US starts opening, there’s effectively a 5 to 6 month period in 2020 where not a whole heck of a lot happened, and the economy starts picking up and importers are seeing sales increase so they start to place more orders. That’s what really kicked off this craziness.
Jason Haith: [00:13:09] We find ourselves in this position now because of all of the issues that the initial problems spurred. So, all of this volume starts coming out of Asia. Steamship lines add additional vessels to start carrying it. But the ports on the US side aren’t capable of processing all of those vessels. So, we start to see congestion and then we start to see congestion at the rail, and then we start to see steamship lines canceling sailings because boats are stuck off the West Coast for three weeks. If you’re three weeks late getting to LA, you’re also three weeks late getting back to Shanghai. So, each one of these issues that we’ve seen that’s sort of propagated across the supply chain in this wave are really sort of predicated on the previous problem.
Jason Haith: [00:14:01] And, the issue I think now is I don’t – there’s no real way to throw money at the problem. A lot of people, I think, in the US are sort of under the understanding, well, let’s just build more infrastructure. And, that’s I think a necessity where it’s possible. LA, there’s just no more land. They need to make the ports more efficient. But the caveat is you don’t necessarily build the transcontinental railroad in two weeks or dredge a whole new port terminal in a month.
Mike Blake: [00:14:39] Right.
Jason Haith: [00:14:39] That infrastructure is necessary. But, man, oh, man, is it going to take a while to show up. And these issues have sort of spring boarded or bounced from one side of the Pacific to the other from the US side, back to the Asia side, back to the US side. And I think that is what has continued to present problems. I believe the community, in general, sort of thinks that all of the infrastructure that’s required to get product, say, from a supplier’s door in Shanghai to their door in Wisconsin or Illinois, it’s all the same person.
Jason Haith: [00:15:20] Similar to Amazon here in the US, you order a product on Amazon and it’s Amazon that shows up at your doorstep in most cases to deliver that. This is different. The trucking companies on the China side are not associated with the depot where they collect the container and they’re not – neither the depot nor the trucking company is really associated with the port terminal. And, the terminal is different than the steamship line. And, the steamship lines are different than the railroads in the US.
Jason Haith: [00:15:50] So, these are all sorts of segmented parts of the process that previously worked together in relative harmony. I mean, it was amazing that you could get a 40-foot container of product from, say, Shenzhen to Kansas City or Chicago in 27 days with very little problem and accurately predict the timing. And now, because, just, for example, the port gets congested in Los Angeles and the, excuse me, the truckers aren’t able to have filled enough chassis to pull out all the containers. A vessel discharges 1000 boxes. There’s only enough chassis to pull 500. Then, the next vessel arrives with 1000 containers on it and discharges all of those. They’ve got to go somewhere. So, those containers get put on top of the 500 that didn’t leave, that weren’t pulled out, and now they’re buried in a stack somewhere waiting to be exposed so that somebody can come in and collect them.
Jason Haith: [00:16:51] So, that particular problem, truckers, chassis shortage, in Los Angeles compound the issue at the port because now there are additional containers at the port that aren’t able to be cleared out. And, those containers compound the congestion issue in vessels waiting because the port can’t process as many vessels if they don’t have a place to put all of those containers, so that vessel gets delayed, and then it gets back up to Shanghai. And that’s sort of the circle, the vicious circle, I think that we in the market find ourselves.
Mike Blake: [00:17:23] So, does that mean that what we’re in is a new normal at least for a while? And if so, what is the timeframe in which we’re going to have to cope with uneven supply issues, especially from foreign sources, before it gets back to what we’re used to?
Jason Haith: [00:17:44] I think the term new normal is pretty accurate, and I think that is a lot of the pain that the import community has gone through that adjustment specifically. I think the remainder of this year will be very challenging. There are already processes underway to try and avert issues with the US West Coast. I think importers are really going to have to take a look at, excuse me – really going to have to take a look at what product is important to them. I think these problems could potentially extend through 2023, where the market and steamship lines are introducing new IMO regulations. Effectively, it’s a Go Green Decarbonization program that will result in lower overall capacity in terms of ships in the water available to move containers.
Jason Haith: [00:18:46] So from the import perspective, I do think it’s a good idea for importers to start looking for product and soon. I think those transit times, most importers right now are already considering or directly arranging shipments to avert the West Coast. The appetite for risk on the import community side is just zero. They don’t need or want any other problems or possibilities that could cause delays. So, I think they’re already taking action in sending product to some of these other places. I do think that’s a good way of proceeding. The other side is the economic side, what’s happening with the economy and our sales in three, six, nine months going to be the same as what they may be looking at right now.
Mike Blake: [00:19:40] So, in this, in the before time, if you will, there is pretty established math or algorithms to decide or determine what your optimal inventory level should be. And I’m guessing a lot of those are being either updated or thrown out the window entirely. In this new normal, how do you attack this? Do you just make sure that you have like, you’re used to having 60 days inventory, you need to make room for 120? Or, is there more math or rigor that can be used to optimize inventory under these conditions? Or is it even possible to do something like that?
Jason Haith: [00:20:22] I think a lot of people have taken a genuine swing at that problem. I’m not sure many have connected with a genuine solution that resolves the issue. The problem is the uncertainty of transit time. Yes, production is an issue. Maybe, it’s delayed a week or two or maybe a month. But the uncertainty of transit is the really difficult part. I’ve seen some shipments take 92 to 120 days to arrive. I’ve seen shipments on the subsequent vessel show up in 25 days. So, that span is incredible to try and account for.
Mike Blake: [00:21:04] Yes. It seems random.
Jason Haith: [00:21:05] It’s complete – it seems like some of these shipments that move really quickly should be kind of statistical outliers. But then, there’s an instance where your vessel arrives and the port’s too congested and they have nowhere to store the containers so you just happen to be the lucky person whose container gets moved straight over because they have no other place to physically put the product. It moves straight through. I’ve seen other instances where the containers get buried in stacks.
Jason Haith: [00:21:34] I think one of the best things that importers could probably do to the best of their ability is diversify, how some of this cargo is coming over and how the product is being routed. So, for example, a 40-foot high cube will hold roughly 65 to 67 cubic meters of cargo. If you just think of a regular old pallet, 4-foot by 4-foot by 4-foot tall, that’s about 1.81 cubic meters. So, a high cube will hold 65 to 67, excuse me, ICBMs. If you take 10 cubic meters off that order and put it in a 40-foot container and send that container to Houston and maybe arrange the other 10 cubic meters through a different port, Savannah or New York or Charleston or something along those lines, that arrangement from a financial perspective is probably more expensive than putting everything in one container. The difference is the product itself, the routing, has been diversified.
Jason Haith: [00:22:39] So, if your container in Houston gets stuck, for example, because there’s port congestion, it sits there for 45 days. If all of your product is in one container, that whole PO is stranded until the vessel docks. If you split that order up, yes, you may be looking at additional costs, but you’re also garnering an additional gateway and access to that product.
Jason Haith: [00:23:05] So, those are some of the ways and some of the advice that I’ve worked with current clients on because I really think that what we’re looking at will be extraordinarily challenging. And, like I said, if all the product is in a single container and there’s a problem with the vessel, with the port, with congestion, you’re basically waiting for everything to be processed at once.
Mike Blake: [00:23:32] That’s interesting. So, I mean, at the end of the day, it is a diversification problem, I suppose. But I don’t know. You tell me that. The reason supplies were concentrated in the first place was because that’s probably how you got the best pricing.
Jason Haith: [00:23:48] Yes.
Mike Blake: [00:23:49] And so, implicit is that you’re probably going to give some ground on pricing in order to ensure or at least hedge to make sure at least some inventory is getting through in a timely or at least net/net on a semi-regular basis. Is that right?
Jason Haith: [00:24:06] That is 100% correct. Price was initially the concern, as it should be, should always be considered. But I think if you were to pose the question to a general importer, would you be willing to pay more money? Fill in the blank, whatever that number may be. More money for better access or more consistent access to your product. I think the answer might be yes because it’s not only the cost that’s really become a problem.
Jason Haith: [00:24:40] Like, I said, I mean, the costs have jumped substantially, but importers have been able to make some of that difference up in increasing their price. That’s a problem that they’re able to cope with in one way, one form or another, not knowing when that product is going to show up. And, the span of time could be 30, 60, 90 days. That’s a problem that retailers and importers don’t really have a good solution for. And so, splitting some of these things up and looking at different gateways will help make more product available more often.
Jason Haith: [00:25:21] I do think all of the Gulf and East Coast ports will be congested, but we could see individual issues exacerbate the problem. Say, in Houston, maybe there’s a chassis issue in Houston and the port overall slows down substantially. If that’s the only bet you’ve made, all your product is subject to that contention. But if you have something coming through Savannah, maybe the delays in Savannah are only 10 days. You know, they’ve recently had to commandeer an airport to store empty equipment because of how much cargo was inside those terminals. At least, the tap is still running. And I think that’s going to be really key moving into third and fourth quarters of this year because this could be really, really challenging.
Mike Blake: [00:26:14] But you touched on something I want to come back to a little bit more explicitly, and that’s pricing. Basic economics says, well, if there’s a shortage of a product, simply raise the price, so I get a market-clearing price. It made me, at least, in the short term, that the seller may make more money. Is that a viable strategy? Or why don’t more companies adopt that approach? Or, maybe they are and I just don’t realize it.
Jason Haith: [00:26:46] I think a lot of companies are trying to do that. I think a lot of them have been successful. Larger companies tend to take a little bit longer to move that mark because the numbers are just a little bit different. I think the short-term answer to your question is, yes, raising their price is a viable solution to the fire that’s in front of them, but there just naturally comes a point when whatever that price is, it’s just too high. Whatever that price becomes just becomes too expensive for that individual making the decision at the store to purchase.
Jason Haith: [00:27:27] And, I think the scary part for a good part of the community is it’s really difficult to find that out quickly. And, what I mean by that is if March 1, let’s say April 1, the consumer is making this decision not to buy that item, you may start to see that develop or become represented in sales, maybe on the 15th of the month. But you could already have 10 or 15 or 20 containers on the water of that product with the costing built-in, assuming the price that is now too high for people to pay. So the long-term answer, I think, is, no, I don’t think it’s a viable option to continue to have to raise the costing. I think that’s a temporary answer to a problem that needs something more resolute in the long term.
Mike Blake: [00:28:25] Are there – other than what you suggest, are there areas where or elements that boiled down to, and put in quotes, simple, and there’s nothing simple about it but maybe just straight-ahead inventory management. Are there other inventory management techniques that can be tightened up also, that can help alleviate, you know make this problem a little bit less severe for businesses?
Jason Haith: [00:28:55] I do. Yeah. I think the answer is yes. I think that requires a lot of coordination between the sales team for that particular company and their operations staff who may be fulfilling those orders. I’ve frequently encountered situations where salespeople are selling a product or presenting a product that may not have arrived, that may still be stuck in congestion.
Jason Haith: [00:29:23] And so, one of the things I do in working with my clients every few weeks, I will personally put together market updates that really speak to issues that I think affect or could affect specific clients. And, I do that because I certainly want the people I’m working with to know what’s going on. But I frequently invite in not just salespeople to those conversations, but also those from the purchasing team because oftentimes the severity of the problem may not necessarily get accurately communicated to a salesperson or a purchasing person, and then they’re sort of left to whatever devices they’ve come up with to manage the problem.
Jason Haith: [00:30:10] So, I think the first place to start is to make sure all of the staff or employees in that chain to move the product from operations to sales are communicating. I think accurate information and really close coordination with providers of all types is really, really important and in conjunction with communication with suppliers, the ones actually producing the product. You definitely don’t want to solve or answer the transportation question, the warehousing question, the congestion or delay question and find out your supplier’s 60 days behind in production.
Jason Haith: [00:30:55] And so, I think businesses in the US have really been sort of stricken with a lot of requirements to operate now that just didn’t exist. These just weren’t problems that the average employee had to really address three years ago. It’s just – everything just kind of happened. The shipment got booked, it moved, showed up when it was supposed to. They got an invoice that matched what they were expecting. They paid it and life went on. So, I think communication is the first place to start.
Mike Blake: [00:31:28] So, actually, that segue is very nice in the next question I want to ask which is, how much do supplier relationships matter? And, I’m going to lump transportation and logistics here, too. And I guess what I’m really getting at is, do relationships matter to make sure or at least influence whether your shipment is going to be prioritized versus somebody else’s I guess what I’m really getting at. Does that matter? Is that a thing?
Jason Haith: [00:32:00] It can be. There are avenues. It’s certainly not easy. On the forwarding side, it requires an awful lot of communication and late-night phone calls and those types of things. That is possible for individual shipments or purchase orders. When you start talking about I want you to prioritize everything I do, that’s a different – sort of a different question. It’s no secret that capacity is really tight. Again, it’s abated. Right now, it’s a little easier now than it used to be. But capacity is expected to be really tight moving forward.
Jason Haith: [00:32:41] And so, I think forming a realistic plan with your provider on how to handle shipments that may genuinely be a line-down situation as opposed to, yes, I need this but I also understand the difficulty in getting this product moved. It is possible to prioritize individual shipments. Usually, that means there’s a cost associated with it, especially if it’s something you’re going to want to continue to do on a regular basis. If everything is hot and priority important, then sort of effectively nothing is because it’s all the same.
Mike Blake: [00:33:21] So, in this kind of and this kind of new normal, what’s the – do we change? Are there different KPIs now for inventory management than they were, or are the KPIs the same but the goalposts have moved?
Jason Haith: [00:33:42] I think the KPIs have probably changed and I think the KPIs have probably changed as a result of changes in sales that importers have seen. And I think that’s one of the big difficulties. In 2020, up through June, nothing had really been ordered because no one was really buying anything. And then, the importers started to see sales increase, realized they hadn’t really placed purchase orders for five or six months, and really started driving inventory because sales really dictated that as a necessity. I think that is likely one of the biggest challenges importers have faced is this violent swing in demand from very light to nonexistent to all of the sudden, more people want to buy my product than I have product. There is, I think, absolutely a backside to this mountain that we’re climbing, the difficulties we face, the challenges. There’s definitely a backside to this.
Jason Haith: [00:34:54] I wish I knew when exactly that was going to be. But the violent swing up in consumer demand and purchasing may result in a similar swing downward trend where people or the general consumer recoils from purchasing those items, maybe because of inflation, whatever the reason may be. And so, I think the topic of conversation, what should I do with inventory, is really pertinent for importers. I think the best direct advice I could provide, I do think importers should add to inventory soon. I do not think importers should assume sales numbers currently or in the previous quarter are the same numbers that will carry over into maybe third, fourth quarter, first quarter of 2023, kind of time frame. I think demand will wane.
Mike Blake: [00:35:52] So, we’re seeing a couple of cases. I don’t know if they’re outliers or not, but one thing we’re seeing is that semiconductor manufacturers or semiconductor vendors, probably the best way to put it, are now starting to break ground on facilities back here in the United States. Do you think there’s going to be – will there be more repatriation of production, or do you think that that’s going to be a very unique scenario? And, we’re just so interwoven with Asia that it’s just not realistic to break ourselves out unless something cataclysmic happens.
Jason Haith: [00:36:29] Yeah. So, funny you mention it. I was just earlier today speaking with a client about this exact topic. I think a few things are going to happen. I think companies, semiconductors, and auto parts potentially will reshore product just exactly like they’re doing because the disruption of supply of that item is so significant to the company that increased cost to produce it here makes sense. It’s a viable option, even though it may be a little more expensive.
Jason Haith: [00:37:04] For companies that aren’t necessarily able to reshore production because of a cost scenario, I think what a lot of them start doing is looking to other sources for similar product. Maybe, that means 60% production in Guangdong, in South China, 40% in a place like Brazil or Germany or France, or something like that. For particular commodities that are able to do it, garments, textiles, things like that, there’s an awful lot of production that goes on in places like India, Pakistan, Central America. There is a sort of pseudo trend, I suppose, called nearshoring, which isn’t necessarily coming back to the United States, but that of a country that is a lot closer, say, than Asia will be.
Jason Haith: [00:37:53] But I definitely think this problem forces importers to genuinely consider where that product is being sourced from. The process was so smooth and so easy that huge swaths of the import community had no problem whatsoever, sinking 100% of their production or near that into the Asian market because things were working so well. And this disruption, I think, has proved that changes can come swiftly and can be painful. And having options available in time of need is now a necessity.
Mike Blake: [00:38:37] So, it makes me wonder, and again I speak more of this as a citizen rather than a business person, but maybe we found the trap that we were paying too little for what we were getting because in effect, what we’re talking about is, whether you’re diversifying supply or repatriating production and those are going to lead to higher costs to some extent, mostly. But that higher cost is basically an insurance policy. Right? An insurance. Insurance is a cost of doing business.
Jason Haith: [00:39:10] I think you are exactly right. Companies in the US, you know, if you go back to the ’40s, ’50s, ’60s, maybe even ’70s, production was substantial in the United States of everything, televisions, refrigerators, all that kind of stuff. That production got outsourced specifically because it was less expensive. They didn’t have to pay people as much and the supply chain infrastructure allowed for it.
Jason Haith: [00:39:39] And I think now what the market is seeing is a period of exceptional delay. There have been disruptions in the industry before and sometimes it took a month and sometimes it was three months, sometimes it was four or five months, but things always went back to the way that they were. And I think that maybe detrimentally reinforced companies’ decisions to leave production in Asia because the problem always blew over and this issue that we’re seeing now hasn’t. It hasn’t gone away in three months or six months. It may not go away for 18 to 24 months. It could be 2023, from 2020. It could be 2023 before we see this settle at whatever it’s going to evolve into. And that landscape warrants a different approach to how companies conduct business as opposed to the landscape or environment that they saw in, say, 2015 or 16, when all of these issues were really sort of resolved.
Jason Haith: [00:40:45] You’re right. I think the US, general US consumer has benefited substantially from the lower cost of that item, and maybe not just the lower cost of the item, but the lower cost, the lower associated cost of production of that item. There are a lot of places in China that have been turned into just terrible places to be, with river pollution and air pollution and those types of things. It didn’t happen here because it was produced somewhere else.
Jason Haith: [00:41:17] I think you’re right. I think people are going to have to adjust to a higher cost product if they want to be able, in your example, to walk into a Home Depot and purchase whatever the item is whenever they happen to be at that particular place.
Mike Blake: [00:41:35] So, I want to ask sort of a broader question here. So, as we rerecord this on March 23rd, 2022, the Russia-Ukrainian War is entering its fourth week and the result of that has been in effect. The West has basically said we’re no longer interested in doing business on almost any level with Russia. And I think that a knock-on effect with that is that I think China will do business with Russia, maybe not to the extent that Russia wants to, but I don’t see them joining the sanctions, which tells me that there’s going to be competing – there’s going to be competing interests for Chinese production capacity and probably capacity throughout Asia, again for the countries that are not participating in the Russian sanctions. Is that something now – is this yet another headache that American or European importers now may have to consider? Is it that – because we’re likely seeing a massive realignment of trade flows at a fundamental level that China may not quite be as available to us just by sheer demand for capacity than it has been in the past?
Jason Haith: [00:42:58] Yeah. You know, there are, I think, a lot of issues that are stemming from Russia’s invasion of Ukraine. One of them is the average consumer certainly sees that when they go to a gas station to put fuel in their car. Trucking companies absolutely see it when they go to fill trucks up with fuel. So, you know, the cost of goods delivered by truck increases. That’s where the average US consumer, I think, sees those problems.
Jason Haith: [00:43:27] I do think this is, as you explained, a realignment potentially of trade. You know, China recently opened a railroad that flows from central China into Europe in the hopes of sort of relying less maybe on ocean transportation but a portion of that rail runs through Russia. And since they’re sanctioned now, they’re not able to bring that product through into Europe because part of the railroad goes through Russia.
Jason Haith: [00:43:58] I do think that China may look to align themselves a little more closely with Russia. Russia may look to buy more products. They may look to settle more transactions internationally, financially, not just for product. But they may look to settle more financial transactions in the yuan as opposed to maybe the dollar, which could really change the dynamic of trade in exactly the way that you had described. Chinese suppliers may be at capacity in providing products into Russia as opposed to providing that product into the United States.
Jason Haith: [00:44:39] Now, I think it has to be said that the Russian economy as compared if you’re China and you’re looking at Russia as a potential customer and the United States as a potential customer, the US wins on pretty much all fronts. They order more products. They’re more consistent. The transactions are easier. People get paid on time, all of those types of things.
Jason Haith: [00:45:04] So, there may be instances where Russia looks to maybe soak up some of that Chinese production, but I’m not sure suppliers opt to offer preference to a supplier in Russia because in most cases, those OEM buyers in the United States will be buying much larger portions of product.
Mike Blake: [00:45:30] Now, this assumes, I think that the suppliers have full freedom of choice.
Jason Haith: [00:45:36] Correct. That’s absolutely true.
Mike Blake: [00:45:39] I’m not sure they will.
Jason Haith: [00:45:39] That’s absolutely true. You know, China’s really exercised pretty stringent control over a lot of functions of business in the economy over there. A lot of their tech companies have been delisted on the US side or are in jeopardy of being delisted from stock exchanges. China’s had no problem in allowing Alibaba and Tencent and guys like that to effectively lose tens of billions of dollars in value to regain some sort of authority over how that business operates and what they do.
Jason Haith: [00:46:20] There certainly could be cases where the Chinese government may be redirects particular product or I think potentially more likely China looks to purchase product from Russia that they weren’t able, that they may not have been able to purchase on their own. So, Russia and Ukraine produce a lot of fertilizer, fertilizer components. I’ve seen some articles around that these additives are really important to US farmers in terms of crop growth.
Jason Haith: [00:46:53] If Russia and Ukraine are potentially unable to sell that product to the United States, China, I don’t think right now, wants to be seen donating money or equipment to Russia because of the sanctions. But I don’t know that it would be all that unrealistic for them to purchase products from Russia that they’re either already purchasing, but just now in larger quantities or new products that they’re trying to pull production out of as a way to sort of funnel money into the government there.
Jason Haith: [00:47:26] It’s a really, really difficult and I think extremely tenuous situation. This is definitely I don’t think the type of situation the US government wanted to find themselves in, not just with Ukraine and Russia, but the relationship specifically with China and Taiwan because it’s a very similar type of situation, I think.
Mike Blake: [00:47:50] Yeah. Well, I think China is watching this very carefully. And my own view, I think China has no interest in getting directly involved in the Russia-Ukraine thing. But they’re not our friends. They’re not our friends either. So, I think they’ll probably offer just enough support to maintain the Russian relationship but no more than that. They might supply food. They’re going to want to buy Russian oil and oil for food kind of thing, but I don’t think it will go much beyond that.
Jason Haith: [00:48:23] Yeah. It’s a tough – it’s, I mean, definitely not what any market needed right now, financial, transportation, or otherwise. It’s just one more additive to this variable concoction that people now have to try and figure out how to account for. And I think at this point, there are so many variables that people are really having a hard time coming up with a solution to the equation.
Mike Blake: [00:48:51] I’m talking with Jason Haith. And the topic is, should I increase my imported inventory holdings? Running up against the clock here, but one or two more questions I want to ask before we let you go. One is, it sounds like a tongue-in-cheek question, but it really isn’t. And that is, if we’re advocating – we’re advocating in some cases that companies may want to carry more inventory than they’re used to carrying but there are shortages. That seems paradoxical. Right? How do you build up inventory in a shortage economy?
Jason Haith: [00:49:32] I think an awful lot of people are trying to answer that question. The way that – I mean, effectively, the only way to do it is to order the product and try and wait for it to get there and hope that more product arrives than what you sell, so you’re able to increase that inventory. Now, if that’s what you’re looking to do, the only realistic way, I think, to get ahead is to just spend the money and airfreight everything over. I think in a lot of instances that’s just prohibitively expensive but I think certainly placing orders to start with. But I also think diversifying how that product is coming over, it will be a real benefit.
Jason Haith: [00:50:17] I think changing the way POs are placed. You know, maybe an importer only sends a 40-foot container instead of a 40-foot high cube. The remaining 10 cubic meters of that product are sent through a different port, and maybe you pull 15 or 20 cartons to airfreight that product over. So, you sort of have three modes of transportation, three different gateways for products to come into the United States in order to try and get ahead of the issue. I think watching sales is going to be really pertinent to try and match on the inventory that may be on the water with what types of numbers are coming down the pipeline. So, you’re in a position where you’re not over-ordering.
Jason Haith: [00:51:09] But I really think diversifying how your product, even if you don’t want to separate individual containers out, I don’t think it’s a good idea to send everything you got to one place. If you’re an importer in Chicago, I would be considering potential Mexico gateways – OEC Group has a program to bring containers into Manzanilla, Mexico – and then transport those containers in bond into Laredo, Texas. Customs clearance works exactly the same. Products get spotted in a warehouse in Laredo and then it can be pushed out to wherever it may need to go.
Jason Haith: [00:51:45] I think Houston would be an option. I would be looking at Norfolk and I’d be looking at New York. And if I had four different containers, I would send one through Mexico, one to Houston, one through Norfolk, and one in New York. Because the problem is product isn’t transiting in a timeframe that can be accurately predicted. And, if all of your product is going into one place and there’s a problem at that one place, you’re dead in the water. Everything you have is sitting on a vessel outside of Savannah or whatever. And, at least, if you’re considering additional gateways and potentially methods of transportation, airfreight or LCL, something like that, you’re lessening the risk that your business gets slammed with a huge backorder issue because all your product is stuck in a single area.
Mike Blake: [00:52:42] Jason, it’s a great topic. We covered a lot of ground, but there’s still other questions we could cover and there are likely questions that our listeners would have liked us to spend more time and a lot more depth. If they want to reach out to you for more information about this topic, can they reach out to you? And if so, what’s the best way to do that?
Jason Haith: [00:53:00] Yeah. They can send me a message, email@example.com. I’d be happy to explain market conditions and offer some advice about how to move forward and some different options to get product over and really sort of strategize in learning what they’re trying to accomplish and trying to tailor something that most closely meets that need.
Mike Blake: [00:53:26] That’s going to wrap it up for today’s program. I’d like to thank Jason Haith so much for sharing his expertise with us.
Jason Haith: [00:53:32] We’ll be exploring a new topic each week, so please tune in so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us that we can help them.
Mike Blake: [00:53:49] If you would like to engage with me on social media with my Chart of the Day and other content, I’m on LinkedIn is myself and @unblakeable on Facebook, Twitter, clubhouse, and Instagram. Also, check out my LinkedIn group called Unblakeable Group’s That Doesn’t Suck. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.