By Vanessa Ting
As of today (Sunday, 2/22) West Coast ports are expected to come back to life. The backlog will reportedly take up to 8 weeks to clear. So the impact to importers and retailers will be felt long after the labor contract dispute ends.
While all my clients who import felt the pinch (more like 'crush'), some felt it more than others.
The companies that minimized the impact of port closures did so because they could:
- Divert boats on water to the gulf coast ports (or be ready to pull that lever)
- Leverage their safety stock in domestic warehouses (one client always keep 6 months of supply on hand)
- Air ship some inventory as needed
- Leverage their early (and heavier) orders placed in anticipation of Chinese New Year to fill the unexpected holes due to the port closure.
Why Inventory Management Is A Critical Skill For Working With Large Retailers
Generally speaking, those who manage their inventory well will have suffered less greatly than those who aren't able to keep safety stock or have built a contingency plan. As a general principle, if you ship to large retailers, you should ALWAYS carry some level of safety stock. You should always have a contingency plan to "chase sales" or deal with the situation where demand outpaces inventory. There will always be some occasion where you have to chase sales. Even without a port closure.
You hear me preach often that there are three primary factors retailers use to evaluate vendors. Vendor execution is one of them. Times like these really expose which vendors are positioned to execute well and which ones are not. Inventory management is a key indicator of strong vendor execution. And while a huge port closure doesn't happen too often, something unexpected in the supply chain almost always does. So this unusual event should serve as a powerful wake-up call to fine-tune your inventory management and supply chain operations. Or just as importantly, make vendors realize they are NOT ready to sell to big retail yet.
Will Retailers Hold Vendors Responsible For Port Closures?
So what impact did this West Coast port closures cause? We're still waiting to hear the reported financial impact, but I anticipate it will be grave. I anticipate small retailers and small companies will have been hurt the most, as well as those who ship and sell perishable goods. I hope no business went upside-down financially as a result, but I wouldn't be surprised.
But the one possible relief is that retailers may not hold vendors accountable for the loss revenues due to short supply. It's an opinion based on my experience, but in practice, we'll see how retailers handle it. I'm no lawyer but your contracts with retailers may have a force majeure clause.
"The force majeure clause in a contract excuses a party from not performing its contractual obligations due to unforeseen events beyond its control. These events include natural disasters such as floods, earthquakes and other "acts of God," as well as uncontrollable events such as war or terrorist attack. Force majeure clauses are meant to excuse a party provided the failure to perform could not be avoided by the exercise of due diligence and care. However, it does not cover failures resulting from a party's financial condition or negligence." Source: Yahoo Small Business
It would seem a port closure qualifies as a force majeure event. Ask your lawyers about this if retailers put pressure on you.
As unreasonable as most retail buyers may seem sometimes, this is one time they may not hold you at fault for inventory shortages or late in-store dates. Some retailers have reportedly sent out letters to vendors saying they still expect on-time deliveries. But when it comes down to it, I will be shocked if any retailers force chargebacks upon vendors for late deliveries or loss days of sales.
What Can Vendors Do Moving Forward?
So what can you learn from this? Plan your inventory better. Build contingency plans for foreseeable events like Chinese New Years. Keep abreast of news (subscribe to industry newsletters, join trade organizations, or easier - read the news daily) to anticipate somewhat foreseeable events. While I did say this event likely qualifies as force majeure, the reality is that it was somewhat foreseeable. The news reported that we should all expect a port slowdown because of this simmering labor dispute. I'm not sure anyone expected a closure to actually happen. And I'm not sure there would have been much time to proactively respond to the port slowdown and subsequent closures anyways. But the lesson learned is to plan for the unforeseeable within reason (as much as your cash flow and financial position allows) and proactively communicate with your retail buyer . Doing so will hopefully help future headaches become more manageable.