Sweetwater’s CSCO Rich provides overview of approach to Peak Season and managing challenges

As the calendar moves closer towards the summer months, it is not too early for shippers to prepare and plan for the holiday rush over the second half of the year, especially this year, a time in which things remain far from usual for a whole host of reasons. These reasons include: still-high ocean freight rates, system constraints, port congestion, labor, and a whole host of others.

These things ring true for Phil Rich, Senior Vice President and Chief Supply Chain Officer, for Sweetwater, a Fort Wayne, Indiana megastore retailer comprised of high-quality musical instruments and studio recording gear. In an interview withLMGroup News Editor Jeff Berman, Rich provided an overview of Sweetwater’s approach to Peak Season and how the company approaches obstacles along the way, too. Their conversation follows below.

Logistics Management (LM):Sweetwater is already ordering for the fourth quarter, the earliest the company has ever prepped for the end of year in its decades-long history (it was established in 1979). In more normal times, when does Sweetwater usually start getting things lined up for the fourth quarter?

Phil Rich:We usually start thinking about the fourth quarter in June and really start executing on our plan in July and August.

LM:What are the main drivers for starting the process so much earlier this year?

丰富:Some of it has to do with system constraints on the part of our vendors. A lot of them continue to run a FIFO (first in, first out) system, meaning that the first order that goes in is the first order that goes out. So, we want to get ahead of everybody else and ahead of our competitors. But along with those conversations, we are talking about what can they produce so that we can place orders and actually get what we placed and not just place total demand orders and think everything is going to be great but it isn’t. It is a collaborative process for sure, more collaborative and earlier than it has ever been.

Our suppliers are from all over the world, and there is a decent number of them in the United States. We have suppliers in Canada, Mexico, Europe, China, Indonesia, and all over the place.

Most of our vendors are either based in the U.S. or they have warehouses in the U.S. So, most of them are handling the ocean freight side. We have one big vendor that we do direct containers with, to the tune of about 200 containers per year, which is not too many, for a lot of companies. What is kind of a struggle is talking to them about how are they navigating through transportation and what kinds of things are they doing, and are they being smart about it. We are asking them a lot of questions about their transportation network and how can we help them.

LM:What are those conversations like? What types of things are being discussed?

丰富:Consolidations would be a big one…whether it is from the Los Angeles area or the New England area or wherever. Having them work with us on consolidation to save either them or us, or both, a bunch of money, and the scheduling of ocean containers, too. So, as much as they believe reality to be one thing, we might believe it to be something different. We might want to have a certain amount of padding in the lead time, and we are having those conversations. Another thing is how they are moving goods in and through their warehouses, and when do they expect them to be full…so, how can we take shipments from them. Normally, they would say “we are not going to take anything at this time, because we are going to be at 85% capacity, but what if we took some of that capacity at just the right time for you?” Those are the kinds of conversations that we have, and they are probably more typical with our top 30 or 40 vendors, because after that it starts to get pretty small.

LM:How many vendors do you have at Sweetwater?

丰富:Roughly 600.

LM:Given the ongoing port congestion situation, which is improving, what types of challenges has it created for you and how have you as a company navigated your way through it? How has it affected operations?

丰富:From a merchandise and inventory planning standpoint, we have had to build in a lot more safety stock. Where we might have had 30 days of inventory and 15 days of safety stock, we are now up to 60 days of inventory and have pushed it out to 90 days for safety stock. It is a significant safety stock change, which I think is smart to do because scarcity can happen overnight, and it can happen very, very quickly. You have to build in what I call a “massive” safety stock difference; I think it is. We also do very detailed supply chain reports for our sales force so that they can have meaningful, real conversations with customers and can actually talk about some of the challenges going on in the supply chain.

LM:Can you please provide an example of that?

丰富:In the guitar business, there are all kinds of different elements that make up sandpaper. You need the right kind of sandpaper for sanding fine instruments, and some of those fine elements are not available right now. Anything can slow down production, and that includes something as simple and little as sandpaper. You would never think you cannot get sandpaper. Most people want to talk about chips or rosewood.

LM:How much of an issue has the chip shortage been for Sweetwater? Are things improving at all?

丰富:这对我们来说是一个问题,我们的最终用户,customers. Our manufacturers are just struggling. Right now, the spot market [for computer chips] is about 50 times normal cost. If you have bought a chip for $6.00 two years ago, you may be paying $300 for that chip now. That has resulted in higher prices, scarcity and elimination of SKUs. There has been this long lag time, where vendors are trying to re-engineer their products to use different chips. Well, when everyone has that same great idea, then that other alternative chip becomes a problem, too, and we have seen that play out already as well. There are just fewer choices of product(s). A company may have made seven different electronic drum sets one year ago but now they only make four. Prices have gone up anywhere from 10%-to-20%. We are seeing consistent price increases from all of our vendors.

LM:There has been some sentiment that the market is entering into a freight recession, of sorts, with demand levels for certain products decreasing. That said, how do you view the current state of demand, and are things are overheated as they were a while back when there was still a lockdown?

丰富:在早期,它仍然是普通消费者来us for USB ports to be used in microphones and small audio interfaces, and headphones, presumably so they could work at home or maybe do some light recording at home. That came and went. Some vendors I have talked to…they have not called it a freight recession, but they think there is going to be a crossover, where demand is going to slow down and they are going to be able to outproduce demand. The problem that is lying out there among the musicians that are our customers is that there is still an absolutely massive backorder. That is something that raw materials and a chip shortage are not going to change on their own. Manufacturers are going to have to decide to make those products that people still want. It is an enormous backorder. I look at that and am not sure we are entering into some sort of freight recession if we have $100 million in backorders sitting out there on products that our manufacturers are just kind of choosing not to make. It has also created this weird demand picture.

LM:How so?

丰富:What has happened is since only a certain percentage of products are being made right now, demand for all of these other really popular products…the data is gone, it does not exist. It would be like saying if a major guitar manufacturer was only making 60% of the SKUs it used to make, there is still a bunch of demand out there for that other 40%. It just has not started making them again. There is kind of like this ghost demand, in that nobody knows what it is going to be. When the breadth of products that used to be on the market comes back to market—if and when it does come back to market—there are a lot of questions in my mind about where things stand. Our business is still strong and we are seeing growth. Until that greatly declines and we see new customers drop off at a rapid rate, it still feels like we are going to continue to grow and there is going to be good demand.

LM:With scarcity in everyday products, there is sentiment that demand will likely soften and inventories will rise significantly pre-Q4, which will make the markets nervous. What do you make of that?

丰富:It is a mixed bag within the availability of inventory. There are just some things that are plentiful, and there are other categories that are not. For example, powered PA speakers are in real short supply right now. My theory there is that if you lengthen out a shortage for a long enough period of time, I think people will just turn their dollars to something else. It could even be outside the industry; it could be anything. That is where I think things could soften across demand. There are certain categories, or products, for which you are just not going to see any of.

LM:And that changes your range of product offerings, right?

丰富:It would cause that buildup of other products that are in plentiful demand. Those other products would build in inventory, and that is where that product comes from.

LM:How did low inventory levels, at different phases on the pandemic, impact your logistics planning and operations?

丰富:我们做了一件真正独一无二的。2020年1月,we looked at the pandemic in China, and we said we would buy everything that is available in our industry right now. We were probably at about $40 million of inventory, at that time, and we shot up to around $70 million or around there. We made a massive investment. Our story is that when the pandemic started, we had a heck of a lot of inventory, and, for about two months, we were pretty nervous. Then, all of this demand showed up, and we had the inventory for it. Maybe that was a unique position for us, I don’t know. We had that curve of inventory go down a little bit, and we have been able to continually rise those in-stock rates. It is a couple of categories that are really suffering the most.

LM:Which ones are those?

丰富:There is the guitar business here. There is technology, recording and live sound here. And then you have other instruments like drums and keyboards, which are separate industries. We just happen to sell all of them, and the one industry that has suffered the absolute greatest is the guitar industry. It has had problems getting metal to make tuning keys, with companies having trouble getting metal from manufacturers because they were shut down from Covid or other issues. Plus, the demand has been off the charts. At the start of the pandemic, we were probably at a 75% in-stock rate, and now we are at around a 30% in-stock rate. There is really no end in sight for that particular business.

LM:How has inflation impacted your logistics and supply chain operations?

丰富:Nothing much has changed with our vendors in regards to inflation. We have had to manage price increases and have done market research to help some of our vendors. For transportation, we have gotten much, much closer to our TMS provider and are doing more things technically with them than we have ever done before, as far as exchange of data, for things like sharing average transit time by state and zip code, and dimensional weight, to make claims against the carriers, for anything at all that has to do with weight or dimensional weight or if they mis-scan something. We feel like we are doing more than ever to save money on transportation. We are digging through all capabilities of our carriers and our TMS provider to find out how we can save, whether that is self-ensuring, sharing more data so that we can get claims done in a timely manner and get reimbursed for claims. It is down to accordion inventory. Anyway, we can share data and use it to save money really.

LM:Fuel prices remain an issue, with diesel up to more than $5 per gallon. How are you handling that?

丰富:We are probably doing what everybody else is going, and that is we have enough freight coming from out west that is not super time-sensitive, we will definitely run it via intermodal. One nice thing about being in Fort Wayne is that we are just a few hours from Chicago, which is kind of a geographical advantage for us. We are consolidating full truckload and have one specific vendor that helps us out in a couple areas of the country. We have managed to drive down our inbound costs actually by about 6% through consolidation. On the outbound side, we have seen some real increases there. Fuel surcharges are certainly one of those things…it is the largest surcharges you are ever going to have. It is kind of is what it is. We just have to stay on top of it and understand it, for budgeting and forecasting as much as possible.

LM:How are you planning for the 2022 Peak Season compared to the last couple of years? How are things shaping up?

丰富:Everything is pulled up 60-to-90 days, including our labor plan. Instead of finalizing that in, say, late August, we are finalizing that in late-July. It is a little bit ahead of time and is a real concern for us on the labor side for Peak Season. The one thing all retailers needs to keep in mind, I think, is your inventory value may have gone up 20%, but the way business is trending, I am not sure how much more physical inventory there really is going to be. The pricing has increased sales for everybody. It has not necessarily driven up transactional demand so we are being really careful to plan for the space far ahead of time. You cannot look at $200 million of inventory today and compare it to $200 million in inventory two or three years ago. It is just physically not the same size. Now, through July, we are going to knock out everything that has to do with Q4, which is the way we do it. We are not overly concerned with inventory carrying costs. We would rather have it than not have it. We are willing to bring in excess and find places to store inventory than what we would normally do. For us, the cost of it is not the problem, as we know we are going to sell it and can carry it a little bit longer. We can live through that.

LM:What are some of the types of places where you store inventory that Sweetwater may not usually do?

丰富:We built a new DC here 2.5 years ago and have other buildings on campus that used to be warehouses and perform other functions for us, for things like pop-up racking in some places and doing some things to create a few more thousand feet of pallet positions around campus we can get access to. We are not dropping storage containers in the yard or anything like that just yet. We are also going to be opening up our West Coast facility in Phoenix and that will start receiving inventory in September and give Fort Wayne a little bit of relief by opening another facility.