Diving letter:
- Levi Strauss is now shipping most of its product across the US east coast amid an ongoing “challenge in Long Beach,” CEO Chip Bergh said on a conference call last week.
- The 20% of products the brand still ships over the west coast have delays built into delivery times, said Bergh, who is also the company’s president and director. Levi’s declined to comment on this story.
- Supply chain issues cost Levi’s “half a point of growth” or “on the order of $ 7 million to $ 8 million a quarter,” Bergh said. “Our expectation for the second half is that there will still be challenges, but we will be doing more air freight.”
Dive Insight:
It’s not the first time Levi’s has spoken about shifting cargo volumes due to supply chain disruptions. The brand reduced its manufacturing activities in China from 16% in 2017 to less than 2% in 2019 to protect its supply chain from trade wars.
A few months ago Levi’s faced a different problem: shortage of stocks led to a drop in sales.
An increase in demand was the main cause of these bottlenecks, but supply chain issues didn’t help. A global shortage of containers already posed a challenge for the movement of goods in the first half of 2021, when an import boom led to congestion in the ports of Los Angeles and Long Beach. At the same time, spikes in COVID-19 disrupted both production and sales worldwide, leading to traffic jams in Yantian, China, for example.
Faced with these challenges, various brands have chosen to absorb the higher one-off costs of air freight rather than losing revenue from inventory.
During the conference call on last quarter’s results, Executive Vice President and CFO Harmite Singh said the company had resorted to air freighting more products to keep the goods in stock.
However, as supply chain disruptions have been going on for months, companies are adjusting their long-term plans.
“Chip referred us to an air freight product in the second half of the year and we incorporated that into our gross margin forecast,” said Singh during the conference call on the second quarter results. “Our long-term assumption is that we will revert to the old shipping standard so that we may not need as much air freight.”
The decision to reroute the cargo was one of many measures Levi’s supply chain team took to minimize disruptions and plan for the future.
“A lot of people talk about not getting a container, not getting on a ship,” said Bergh. “The team has done an exceptional job of giving us guaranteed space and guaranteed prices, which helps us control our costs.”
Looking ahead, Levi’s has also negotiated limits to cost increases through mid-2022, opened a new proprietary distribution center in Nevada, and tested AI-driven forecasting, executives said.
But the forecast improvements in particular are key to the company’s long-term supply chain strategy.
“The results of our first wave test showed that AI-driven demand forecasting improves accuracy,” said Bergh. “Scaling should therefore allow for more precise inventory investments, fewer discounts and clearings, avoiding waste and improving sustainability, which will all improve our margins.”
Comments are closed.