As Inventories and Capacity Expansion Grew Too Quickly in 2022, Customers are Forcing Suppliers to Bear the Brunt of Optimistic Forecasts
In today’s Wall Street Journal, I was interviewed regarding a case that was just filed against Amazon by a large robotics , claiming that the e-commerce giant backed away from promises made early in the Covid-19 pandemic to support the supplier with millions of dollars in new purchases.
The lawsuit alleges that “…Amazon Robotics, which manufactures robotic storage and delivery systems for organizing and transporting inventory within Amazon.com’s massive warehouse distribution centers, pressured Gilimex, a Vietnamese company that manufactures steel and fabric storage containers, called Fabric Pod Arrays (“FPAs” or “pods”), for use in those systems, to dramatically expand its production capacity to enable Amazon.com to meet the rapidly growing demands of its burgeoning e-commerce business. Relying on Amazon’s repeated assurances that the two companies were engaged in a “strategic partnership,” and that Amazon would protect Gilimex from business downturns by, among other things, (i) providing advance forecasts of changes in demand and, (ii) if demand decreased, continuing to purchase substantial quantities of pods to enable Gilimex to gradually ramp down production, Gilimex agreed to build new production facilities, increase its work force, and cease selling pods to any customer other than Amazon. However, in the spring of 2022, when Amazon’s forecasts for pod purchases abruptly dropped, Amazon failed to provide any advance warning, and refused to (i) accept pods that Gilimex built in reliance on earlier forecasts and experience, (ii) compensate Gilimex for raw materials purchased in reliance on such forecasts and experience, or (iii) provide Gilimex any time to gradually ramp down production, resulting in the immediate and virtually total destruction of Gilimex’s business. Moreover, Amazon refused even to discuss the situation in good faith with Gilimex, locking Gilimex’s CEO and management team out of Amazon’s headquarters in North Reading, Massachusetts after the Gilimex team had traveled thousands of miles from Vietnam for a meeting.”
I’m sure that there are two sides to this story, as there always is in any contractual dispute. However, I’ve been hearing more and more stories about how the rapid over-expansion of many brands and retailers in 2021 has proven to result in all kinds of problems, specifically around additional inventory, excess capacity, and over-expansion of the workforce. Many of these commitments were made based on verbal guarantees or assurances made between buyers and sellers at the outset, which many large brands are now reneging on. I’ve heard about the following examples for instance:
- A large apparel brand requested about 20 of their largest textile mills (many in Pakistan, Singapore, China, and other regions) to travel all the way to San Francisco for a “Vendor Summit”. They then sequestered each individual in a room, and two individuals came in and told them that they needed to reduce their prices by 20%. This price reduction was to be applied not only to future shipments, but indeed to all shipments that had been committed to, whether in transit, or even in the buyer’s warehouse which had already been shipped. If they did not agree, their business relationship would be terminated. This is equivalent to extortion, and actually borders on being illegal.
- One of the largest retail brands is moving their vendors from FOB (Free on Board) to domestic buying, and the shift is happening fast. Walmart will pay more for domestic sources, but will not be burdened with the inventory and purchasing FOB. They are also canceling orders, decreasing quantities, and deducting off invoices, which they claim as “chargebacks” for “late deliveries”, from shipments which were received as late as last year.
- A large consumer products tool manufacturer noted that they were overwhelmed with massive volumes of inventory, that was purchased based on sales projections from major retail customers. The inventory volumes are so great, that there is no room in their warehouses to store the product, and retailers won’t take any more shipments. The company is accusing millions of dollars in drayage fees as their inventory sits in containers at major ports!
As I’ve discussed in a recent post on Supplier Relationship Management, these types of problems can be averted through a simple mechanism: improved communication and planning on the part of the customer. In all of these cases, the supplier was asked to make a commitment of capital investment in facilities, workforce increases, and material purchases, in anticipation of increased demand. At some point, there was a “meeting of the minds”, when the buyer (customer) committed to the volumes projected, which required this level of investment. Indeed, in the case of Amazon, the WSJ reports that Amazon promised to help guard Gilimex against business downturns by giving it advance notice of changes in Amazon’s demand forecast and by scaling down purchasing gradually in case of a downturn so the manufacturer could gradually ramp down production. Gilimex claims Amazon pulled back its forecast for the year sharply in May, to far lower levels than projected and refused to compensate the supplier. Gilimex’s investments were made in reliance on the trust and confidence that they placed in Amazon as its acknowledged strategic partner, as well as on Amazon’s unique expertise in accurately forecasting the volume of pods that Amazon would require to meet the fast-growing needs of its business.
What happened? Mistakes happen. That is the nature of the volatile supply chain ecosystem that we find ourselves in going into 2023. In such cases, it becomes more essential than ever to have frequent, in-depth communications between buyers and sellers, to provide updates and discuss risks of expanding too quickly. However, with the drop in volume, many smaller suppliers like Gilimex do not have the working capital to support carrying the heavy debt and material inventory costs associated with an expansion which does not pan out. Big retailers and brands have much more working capital, and are able to bear the brunt of these mistakes much better than their suppliers.
In my experience, many companies do not do a good job of communicating demand shifts, and do not have a good approach for managing risk when it comes to rapid shifts in economic conditions. Suppliers are an essential component of today’s competitive economy, and it’s high time that senior executives pay more attention to suppliers, and treat them as “partners”, rather than as “vendors”. This requires dedicating resources to understanding their economic landscape, their financial position, their capacity expansion plans, risk mitigation and business continuity planning, and other essential elements that ensure a smooth operating environment. While there are always mistakes, it’s not okay to push the blame on suppliers and have them bear the brunt of a buyer’s mistakes. A true partnership means both parties need to share the rewards, as well as the risks.