by Walter E. Tobin, ERA CEO
This time a year ago, many of us were asking our partners (and were also asked by them), “How’s business?”
We then may have listed a litany of challenges that we were dealing with: long and uncertain lead times, unclear/inaccurate forecasts from our customers and being asked to adhere to and/or pass along NCNR clauses that had never seen before. There were shipping issues, port backups, the Great Resignation phenomenon, work-from-home issues, the search for the “golden screw”— so many things for us to consider and manage every day.
Yet, when a follow-up question was asked or we asked, “How’s your revenue this year?” we often said or heard, “We are having a record year!”
How was that even possible? I guess there must have been some product somewhere that was able to be shipped and billed to someone.
Was all of this product really needed? We have now become aware that there was a lot of double/triple ordering done to hedge our bets on averting product shortages. We may have agreed to NCNR clauses that we would have never even considered to agree to in the past, all while hoping that our own “golden screws” arrived on our docks.
So here we are a year later. Lead times have returned to a more normal cadence and many golden screws have been received. The NCNR clauses that we agreed to are now being enforced, all leading to a period of declining bookings with book-to-bill ratios falling below 1:1. We are now relying on our past order backlog to sustain us.
Bookings down, billings falling, inventory rising…yikes! What are we do to now? Some companies have adopted a “damn the torpedoes: full speed ahead” policy: cancel open orders, refuse shipments on past orders placed and accepted in good faith, renege on NCNR orders and begin to sell excess inventory on the open/gray market. This is all to achieve some short-term relief and to try to maximize their own quarterly/annual financials. Some of these tactics are working!
Some companies are demanding lower prices due to the return of a “buyer’s market” and to take advantage of companies who are now swimming (drowning?) in inventory. These companies are under pressure to reduce their own inventories and sell at reduced prices that will then lead to their own lower margins, which will then wreak havoc on their own financials.
In addition when companies sell their excess inventory to the gray market, it sits out there only to be sold down the road to customers who may take advantage of lower prices who may have bought this product from the authorized manufacturer/distributor channel who were relying on new orders down the road to help them sell their inventory. This excess inventory sits out there and then is sold down the road at lower prices —another short-term action that has longer-term ramifications on our supply chain.
When COVID-19 hit and the supply chain “broke,” why did it break? Because no one had any “upside” inventory to support the need for unforecasted demand inside of lead time. Customers were clamoring for manufacturers to simply “turn on” or build factories to support this unforecasted demand and many were asking as to why the distributors did not have more product on their shelves.
We will never learn, will we? But here we are again, looking to take margin away from the company to our left and right in the supply chain and to demand lower prices which then limits their ability to fund unforecasted inventory in the supply chain.
We need to try to take the long-term approach. It doesn’t help that Wall Street forces public companies to look at business on a 90-day horizon which forces public companies to do the yin and yang every 90 days. Wall Street also forces our publicly traded suppliers and channel partners to fight each other while customers are looking to us to right the ship, all while demanding lower prices.
A new and perhaps naive approach is for each one of us to ask the company above and below us in the supply chain for their help and guidance on preventing the supply chain disaster of the COVID-19 period from happening again. Ask, “What do you need from us?” Perhaps allow them to make a bit more margin on our business to then help fund new factories, unforecasted demand and shorter lead times. Build a true partnership based on mutual respect and trust, and not just on price alone.
Try it on one of your supply chain partnerships and see what they say. What harm can it do? You may end up positioning your company ahead of the rest of your competitors when times get tough again. It’s worth a try!