…Supply Chain Nightmare!
By Jay Townley
From January 1983 through October of that year I served as Vice President and Assistant to the President of the Schwinn Bicycle Company. My primary focus was the closing of the company’s domestic factory in Chicago and moving 90-percent of the production to Taiwan and the remaining 10-percent to a domestic contractor.
From November 1983 until leaving the company in April 1990 I served as Vice President Purchasing and was responsible for converting the company’s purchasing and logistics operations from supporting a domestic build-to-order manufacturing and parts supply model to supporting an import ship-to-order wholesale model.[1]
I am referencing this seven-year period because I want to confirm that I was a purchasing and logistics practitioner in the American bicycle business. While it was 30 some years ago, I still have first-hand experience with and knowledge of the current…Supply Chain Nightmare!
Over the last 30-plus years the U.S. bicycle business has become totally import-dependent and that dependency has migrated from Taiwan to China since 2000 to the present. Table 1 is taken from the NBDA U.S. Bicycle Market Overview 2020 Report (where it is identified as Table 19), and it shows U.S. Bicycle Market Import and Estimated Domestic Production as Percent Shares of Annual Market Consumption from 2011 through 2020. Over the ten years shown imports have spanned a low of 96 percent to a high of 99.7 percent of the U.S. bicycle market.
Table 1
U.S. Bicycle Market Import and Estimated Domestic Production
Percent Share of Annual Consumption
2011-2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Domestic Percent*
0.4
0.3
0.4
1.1
2.5
2.8
4.0
3.0
4.0
3.7
Imports Percent*
99.6
99.7
99.6
98.9
97.5
97.2
96.0
97.0
96.0
96.3
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Table 2 is also taken from the NBDA U.S. Bicycle Market Overview 2020 Report (where it is identified as Table 31), and it shows U.S. bicycle imports by Country of Origin for the last three years, 2018, 2019 and 2020. China has dropped from 94.9 percent of total U.S. bicycle imports in 2018 to 88.9 percent in 2020.
Table 2
U.S. Bicycle Imports by Country of Origin 2018, 2019, 2020
Units and Country Percent of Total
Year
China Units
Taiwan Units
Cambodia Units
Vietnam Units
Other Countries Units
World Total U.S. Imports
2018
16,287,067
581,209
128,364
7,769
166,180
17,170,589
2018%
94.9%
3.4%
0.7%
0.0%
1.0%
100%
2019
11,578,356
792,931
264,919
104,809
147,798
12,888,813
2019%
89.8%
6.2%
0.8%
0.8%
1.1%
100%
2020
15,109,868
755,691
793,715
104,308
226,614
16,990,196
2020%
88.9%
4.4%
4.7%
0.6%
1.3%
100%
Section 301 25 percent punitive U.S. tariffs were imposed on imports from China in 2018 (in addition to the standard 5.5 percent and 11 percent import tariffs on bicycles and the 0 percent tariff on Ebikes), and were suspended in late December 2019, and remained suspended throughout 2020, and were reimposed late December 2020. Section 301 tariffs had no appreciable effect on the consumer demand at retail for bicycles and Ebikes – until perhaps, most recently.
Also of interest is the sub-total of U.S. bicycle imports from the four Asian source countries of China, Taiwan, Cambodia and Vietnam 99 percent in 2018, 97.6 percent in 2019 and 98.6 percent in 2020, leaving only 1.3 percent of total U.S. bicycles imports coming from any other source country.
This becomes extremely important to the evolving Supply Chain Nightmare when viewed in the context of reports in the last week that COVID-19 is surging back into Asia-based supply chains – creating a fresh wave of disruptions and bottlenecks from ports in China to factories in Taiwan and Malaysia.
According to the Wall Street Journal Logistic Report June 11; “Dozens of vessels are backed up off the Yantian port in Shenzhen, straining fragile shipping operations that have been battered by a persistent empty container shortage and a continuing bottleneck at U.S. West Coast ports.” The reason? A shortage of workers because of a surge in COVID-19 cases!
Container costs are soaring, and logistics service providers report desperate American importers paying well beyond even the listed spot rates. Human Powered Solutions (HPS) Senior Logistics Advisor Dave Karneboge reported June 7 that the none contract rate, which currently represents about 30 percent of container shipments, is currently $10,000 for a forty-foot container that cost under $2,000 a year ago. Twenty-foot containers now cost $9,000 – which makes them currently unaffordable, and HPS is advising clients to use freight consolidators until container prices come back down.
A recent Sea-Intelligence analysis shows an estimated 60 percent of container ships globally were late in arriving at ports in March, and according to the Wall Street Journal Logistics Report this “…trend toward increasing delivery delays” has undercut the efforts of brand and retailers to restock depleted inventories.
The following Chart A is from Sea-Intelligence and shows the Average Monthly Schedule Reliability by Major Container Shipping Line Since January 2020 through March 2021.
Chart A
Note that the Average Monthly Schedule Reliability has steadily declined since July 2020, and while it did increase in March 2021 it was at 40 percent On Time, meaning 60 percent of scheduled container shipments were late – adding to the uncertainty and disruption.
Bicycle Retailer and Industry News ran an article June 11 quoting a Shimano Newsletter announcing the component brands “…Malaysia factory is shut down completely until June 14based on the Malaysian government direction.” Further, “…So far, the Malaysian government has not informed Shimano what it plans to do after June 15th, so stay tuned.” The reason for Shimano factory being shut down? The current COVID-19 situation.
This past week Taiwan announced an alarming increase in COVID-19 cases and deaths, and the spread of the virus into Taiwan’s factories that is threatening to delay shipments that are already behind schedule because of component shortages.
While relatively small, with 23.86 million people, Taiwan is, in many ways, the linchpin in the American bicycle business supply chain, and it is suffering from its first large COVID-19 outbreak. It is estimated that about 80 percent of the bicycle export business done by China is owned or controlled by Taiwanese companies and brands and this supply chain is already under huge pressure, so any further reduction in supply capacity is going to exacerbate the shortages.
While discussing this situation at the end of this past week the HPS team was informed that a component brand (not Shimano) had just announced a new lead time, out to December 2024 – that in turn was threatening new start-up customers with literally shutting down.
Part of this situation is being driven by both the availability and rising cost of raw material. On June 2, the Wall Street Journal reported that, “China’s factories are buckling under the weight of rising raw materials prices.”
According to this article, “Some manufacturers are refusing to accept new orders and are even considering suspending operations” and while we could not confirm that any of these manufacturers are in the bicycle supply chain, the article did go on to report that the pressure to suspend operations was the result of, “…the added costs weigh on production and threaten to further strain global supply chains.”
There is no question that many Chinese manufacturers have passed along higher costs to overseas buyers, evidently some are finding it hard to raise prices enough to make up the difference.
The quandary the Wall Street Journal is reporting is just the latest result of COVID-19-led disruptions that have thrown supply and demand fundamentals grounded in Just-In-
Time, or JIT Systems, off balance, triggering shortages in many sectors and soaring prices for many commodities.
From 1990 to 2020 the bicycle industry global supply chain has been focused on improving and refining Just-In-Time, or JIT manufacturing and logistics. The JIT System was conceived by an American, Dr. William Edwards Deming (October 14, 1900 – December 20, 1993) who was an American engineer, author, and management consultant. Deming helped develop the techniques still used by the Asian bicycle supply chain manufacturers engaged in exporting their products to the rest of the world.
Deming is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry including Toyota. That work began in 1950 and was soon embraced by Shimano Corporation and spread to the rest of the Japanese bicycle industry and to the Taiwanese and eventually the Chinese bicycle industries. However, Deming and his JIT System was not known, recognized or taught in the U.S. until the early 1980s.
At its very best, the JIT System forecasts, purchases, manufactures and delivers on the day and hour that a component is planned and required for assembly of a manufactured product so that it can ship on schedule and be delivered anywhere in the world on the day it is scheduled to ship to a retailer or directly to a consumer. This is the ideal that was continually strived for, and while not often achieved pre-pandemic, most supply chains came close.
These are the supply and demand fundamentals of the bicycle supply chain that are grounded in JIT Systems that COVID-19 led disruptions have thrown off balance!
Today, because of the growth of direct-to-consumer and the mind-set of the JIT supply chain, there has been inventory and an on-going demand, in just about every zip code in the U.S. Companies, including bicycle brands and retailers, are struggling with the trade-off between the customer experience and the cost of inventory – in the midst of shortages created by a supply chain that is totally off balance.
At the OEM side of the supply chain, what is being reported is China’s factory owners hoping that if they delay orders or slow production, they will be able to ride out the present period until commodity prices normalize or global demand for consumer goods cools.
Assuming that this reporting is at least partially if not totally accurate, this represents a bigger gamble than that taken by the American bicycle importers in reducing order flow in 2019 to minimize the financial impact of the Section 301 punitive 25 percent tariffs. The end result was a self-imposed shortage of 4.4 million fewer bicycles to meet the increase in consumer demand during the first two quarters of 2020 – when the Chinese OEMs could not increase production to meet the increased orders from the American importers.
The gamble the Chinese factory owners (including those owned or controlled by Taiwanese) are taking now has the immediate impact of more inflation across supply chains, including the bicycle supply chain, right down to the showroom floor and store shelves. While there is a lot of speculation right now about inflation, the most significant comparison with the consumer price index won’t be available until early next month so we will hold further comment on this topic until the beginning of the third quarter.
Of more immediate concern relative to the U.S. bicycle business supply chain is what logistics experts refer to as the Bullwhip Effect. The Bullwhip Effect (also known as the Forrester effect) is defined as the demand distortion that travels upstream in the supply chain from the retailer through to the wholesaler and manufacturer due to the variance of orders which may be larger than that of sales.
Chart B illustrates the Bullwhip Effect, starting with the Consumer to the left, which is the handle of the bullwhip, or consumer demand.
Chart B
The Bullwhip Effect
The dark lines represent the Order Quantity, and the lighter lines represent the Stock or Inventory in the supply chain, starting with the Retailer, followed by the Wholesaler, or Brand and finally the Manufacturer to the far right.
What is not shown in Chart B is Component brands and manufacturers who certainly play a key role in the industry supply chain for bicycles and Ebikes to meet consumer demand.
However, Chart B does provide a visual representation of how the Bullwhip Effect manifests itself, moving from the Consume, upstream to the Manufacturer, and the reason why the American brands and wholesalers are doing everything possible to minimize its effect – despite the Supply Chain Nightmare!
The Bullwhip Effect in the supply chain can be reduced through shared knowledge with suppliers and retailers. If members of the supply chain can determine that there is skewed or bad information causing the overreactions, they can be resolved through improved communication and the exchange of accurate and timely information and data. However, this cannot be a one-way street and has to be open two- or three-way communication.
This only serves to emphasize what we have come to realize - 2020 was an Inflection Point! Economists tell us an Inflection Point Event, like 2020, results in a significant change in the progress of an industry, business or sector and can be considered a turning point after which a dramatic change, with either positive or negative results is expected.
2021 is truly a Supply Chain Nightmare, but that doesn’t mean the American Bicycle Business cannot quickly learn and adapt to shifts and changes in consumer buying habits and change and modify both the supply chain and supply chain logistics to adapt to consumer wants and needs and turn the Nightmare into a positive result - a dream for the Future!
[1] Schwinn Bicycle Company established a national network of four regional warehouses from 1964 through 1977 known as Sales Companies that stocked and sold parts, accessories and tires and tubes to Schwinn retail dealers, along with a back-up stock of bicycles and exercisers. So a complete wholesale warehouse structure was already in place when bicycle and exerciser manufacturing converted from domestic manufacturing and build-to-order to foreign sourcing and importing and ship-to-order from 1983 forward.