Now that we have updated readers on global production and supply chain activity levels during the third quarter, we will now transition into the upcoming holiday fulfillment quarter where overall volumes can make or break financial and profitability outcomes.

According to the National Retail Federation, upwards of 20 percent of U.S. retail occur in the final quarter. Beyond retail, the ongoing COVID-19 pandemic brings additional challenges in the area of medical products and vaccine distribution. Logistics and transportation resources and capacity have been continually taxed and now, the test begins once more.

By many measure, this upcoming quarter has all the appearances for providing monster challenges.

 

A Different Holiday Calendar

Traditionally, the surge in holiday related sales and product promotions kicks-off with the Thanksgiving holiday in November, followed by the Black Friday and Cyber Monday shopping holidays.

This year, Amazon is likely to be the catalyst for a far earlier kickoff. Amazon’s annual Prime Day shopping holiday which usually occurs in July has been rescheduled to occur as a two-date event on October 13 and 14, which is next week.

Amazon branded delivery vans

The Wall Street Journal recently reported that the online retailer is estimated to have raked-in $7 billion in sales during last year’s Prime Day event along with over 175 million items sold during last year’s two-day event.

The online retailer typically offers attractive discounts on a slew of Amazon’s branded electronics products. This same WSJ report cited an Amazon internal email indicating that due to the delay from July to October, the  online retailer had “overhang” or excess inventory exposure of five million units which would place between $100 million and $300 million in discounted risk.

As many of our readers are aware, the online retailer has invested in significant large-scale expansion of online fulfillment with the goal of all facilities to be in readiness starting this quarter. This year is no exception. Amazon has already initiated plans to carryover supplemental workers hired to meet pandemic demand as well as to hire an additional 100,000 warehouse fulfillment workers for placement in U.S. and Canadian facilities.

However, recent investigative reports concerning Amazon fulfillment facilities indicate the prevalence a rather high incidents of worker accidents during peak holiday periods. The organization Reveal from the Center for Investigative Reporting alleges in a recent investigation of Amazon’s company records spanning 2016 to 2019 that company officials “have profoundly misled the public and lawmakers about its record on worker safety”, including 14,000 serious worker injuries in 2019. The common themes of this report: extra hours, high worker volume output requirements and consequent extreme fatigue.

To counter Amazon, many retailers are planning their own sales promotions to either precede the event or run simultaneously. At the same time, brick and mortar retailers have been negatively impacted by ongoing pandemic physical shopping restrictions and thus margins will be tightly monitored.

Another always looming factor is Apple and its holiday focused new product availability. The iconic high-tech consumer electronics provider has already announced availability of new models of Apple iPad models as well as a new models of Apple Watches. Expected to be announced next week are the new models of Apple iPhones, more than likely being made available in October or November. With the volumes of orders that these products tend to garner, logistics networks will be doubly stressed especially if availability and supply of iPhone model stretches into the November or December time periods.

What may occur is that just like last year, when many online consumers completed the bulk of their holiday shopping by Cyber Monday, typically the first week in December, some may do so by the end of October.

As we have noted in other commentaries, another need for preparation concerns whether there are second-wave occurrences of virus infection causing localized movement and physical shopping restrictions. That will likely continue to drive more online consumers to shop for essential food and products via online channels and delivery mechanisms.

 

Further Compounding Challenge- Higher Parcel Transportation Costs

As Supply Chain Matters and other logistics and transportation media have noted, major parcel delivery carriers FedEx and UPS have elected to aggressively incur additional peak volume surcharges in conjunction with this quarter’s peak holiday period. The United States Postal Service (USPS), also under continuing cost and operating pressure is further implementing holiday quarter surcharges. In each of these actions, depending on the particular retailer, such surcharges are predicated on volumes shipped in any given day, or actually capping shipments to a certain daily volume.

A recent posting from FreightWaves indicates that with parcel shipping demand expected to be as much as 50 percent higher than 2019, the parcel carriers are placing maximum negotiating pressure to extract added surcharges, even from large retail shippers that could previously shield themselves from such charges because of annual volumes. The sum total of this report is that the pendulum of negotiation leverage has swung to the carriers and the result may be lower discounting of published rates, potentially much higher order fulfillment shipping costs and even longer quoted standard delivery times for parcels.

 

COVID-19 Vaccine Distribution

The final looming challenge is whether availability of various in-trail COVID-19 vaccines reach a point where initial priority inoculations can begin by the end of this year.

Many pharmaceutical companies sponsoring specific vaccines are gearing-up for some initial distribution in the U.S. and other global regions by the end of this year.  The question is how much volume and from what points of distribution. Most of this vaccine has to be temperature controlled for its entire journey to patients, some at temperatures near freezing while others far lower.

The overriding assumption is that much of any vaccine supply will travel via air transport. The International Air Transport Association, an industry group representing passenger and cargo air carriers has indicated that just one dose of the vaccine destined to supply global populations would require the equivalent of 8,000 fully loaded Boeing 747 air freighters. While that number is not likely to be presented in the coming quarter, there could likely be some priority air demand. The question is how much and in what month.

The reported industry concern is that air cargo capacity is quickly being locked up for holiday merchandise priority shipments, more than likely including Apple’s product movements from Asia to Europe and the U.S.

An executive from FedEx Express recently told The Wall Street Journal that the carrier is planning for “the mother of all peaks” this quarter. Other air cargo carriers are pulling mothballed cargo aircraft from storage while some international commercial airlines are accelerating conversion of passenger aircraft to accommodate more airlift needs.

Within the U.S., the Trump Administration’s Operation Warp Speed has already contracted vaccine distributor McKesson to oversee the logistics of distribution while the President himself has indicated that the U.S. Military will support vaccine distribution by leveraging existing commercial transportation capacity.

What all of this implies is a rather significant unknown related to global and domestic priority and temperature-controlled transportation over the coming three months.

One sure bet is that rather than priority logistics and transportation services capacity waning after the final quarter, they will likely continue to ramp-up to meet global vaccine demand fulfillment. Technology is likely to play a more meaningful role in earlier notification and addressing of bottlenecks or choke points.

 

In summary, the next three months provides a further set of challenges requiring constant monitoring, capacity adjustments and available flex supplemental resources. The difference this time is that many participants have high stakes in terms of financial outcomes.

 

 

Bob Ferrari

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