Make no mistake, disputes around tariffs could preoccupy the global supply chain network in the years to come.
In the wake of the trade truce with China, Steven Hughes, CEO of HCS International, idealized the adept supply chain navigator. "Anyone worth their salt who has the managerial wherewithal to take a 10,000-foot view is going to look at the entire picture." He worries that pockets of the industry are taking a partial view to their detriment.
Moving auto parts from overseas shipping ports to stateside distribution hubs has become increasingly complex. This former VP of supplier development for Centric Brakes, who regularly advises the U.S. Department of Commerce, spoke with Aftermarket Business World about which trends automotive aftermarket purchasing teams should be monitoring to make more money.Compared to other transport modes, overseas cargo shipments are by far the most affordable option, says Hughes. Importers can expect to pay in the low thousands of dollars for a 20- or 40-foot container. Two years ago, he immediately detected an uptick in ocean freight charges as a result of the fallout from the trade dispute with China, the world's second-biggest economy after the USA.
When factories and retailers began running up their inventories ahead of the duties imposed on Beijing, two impacts unfolded, observed Hughes. Rising shipping container fees reflected the spike in orders by American parts suppliers who strove to outrun each round of tariffs by stockpiling hard parts. In turn, ocean freight spot-rates more than doubled as container availability grew scarcer.
Robust U.S. consumer spending, especially in ecommerce has also fueled demand for storage space. Major markets on the east and west coasts, including Houston, Chicago and Miami, said Hughes, are experiencing an unprecedented flurry in leasing activity that is reordering the vitality of commercial warehousing. "I've seen property values double in costs in the past 11 years," said Hughes, who works near the seaport city of Long Beach, Calif. "As leases expire under new owners, I foresee increases in renewal prices or new leases."
Managing these financial variables requires a holistic approach to curb costs and defend profit revenues. From Hughes' perch, importers are now finding their finances stretched. "Businesses are forced to deal with tighter margins," he notes. Saddled with months of inventory reserves and less cash flow on hand, suppliers have fewer choices. Shoppers will inevitably pay more due to the housing, handling and shipping costs passed on by the merchant.
According to Dan Hanson II, director of Hanson Distributing Company, the tariffs have not been as impactful as feared where the distributor sells foreign car parts throughout California and Arizona. But Hanson suspects that the service dealer is selling the budget-conscious customer a midgrade component instead of premium quality. Without providing specifics he said, "Some of our competitors have decided to bear the brunt of lower margins on themselves by cutting their prices on the street with parts like brake rotors."
These variables pose a financial risk to the bottom line for importers, which Hughes qualifies as Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). When it comes to EBITDA, he estimates that 90 percent of buyers are unaware of what they can control. Hughes suggests their purchases from abroad have often invariably limited their employers' profitability.
"I find that the automotive aftermarekt has overlooked some of the critical aspects in ocean shipping," stated Hughes, who has worked on the issue since the late 1980s. Material buyers, he implied, are susceptible to cultivated siloed departments. Purchasing focuses on item reduction. Logistics worries about timely boat arrivals. Hughes finds that lack of communication between both sides may drain profitability out of EBITDA.
Hughes preaches capturing the “landed” or net cost. He also advocates that management should account for how much the overseas invoices figure in for the myriad SKUs. Buyers should collaborate with logistics to uncover where hidden dollars lay when moving the goods into the distribution center.
Cargo line statements frequently come with printed detailed jargon, detailed with seemingly legitimate mind-numbing acronyms. In past instances, Hughes has seen importers approve the bill when in fact they ought to be questioning everything. Stressing profit protection, Hughes emphasized, "You can't let the pennies drop through your fingers. You've got to look at everything!"
In one episode, Hughes recalls the buying team prematurely declaring victory on negotiating the best cost on their top mover at $10 to resell at $20. But nobody protested the $1.20 shipping charge that could undermine the penny profit volume windfall.
The rub, explained Hughes, is that each item translates into "big dollar numbers," when compounding the exponential loss in the high multiples of brake parts flowing from numerous exporting countries. In this case, Hughes halved the shipping value from 12 percent to six percent, a win for EBITDA.
Every opportunity to avoid commoditization matters for Hughes, given where finding the next manufacturing profit center is constant. "If I were to move a product from China to another country, I would be looking to save 40 percent to 50 percent." Yet he doubts that the automotive aftermarket will relocate its manufacturing base to the United States. If a host country can guarantee quality, availability and cost, Hughes points to lower-wage Vietnam, Indonesia or India.
That's why, said Hughes, that in the overall scheme, ocean freight from those seaports still compete with cross-country truck hauls for the equivalent load that runs 10 times as much. Lately, though, prices are quietly rising, which concerns him about building awareness. Convincing buyers to stop resisting practicing global supply chain management is one hurdle for this industry's watchdog.
Hughes created his platform through the Auto Care Association and Motor and Equipment Manufacturing Association to enlighten the industry on how to spot money-making opportunities. For 2020, he has lined up several educational webinars.
He also represents Gemini Shipping Associates, a non-profit association, which pools the membership spend to cost-saving levels. Presently, Hughes is monitoring the low-sulfur fuel charge that went into effect in January.
Looking ahead, few experts know when trade relations with China will improve, or which country the Trump administration might target next. Inside the aftermarket, the hunt for the next reduction in costs stands as business as usual. What follows? "The aftermarket is still very much going to be a global supply chain, and I doubt that it will ever change," explained Hughes.
