June 17, 2021

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Is an inventory glut inevitable? ‘The short is answer is yes,’ says Jay Townley

By Jay Townley

Editor’s note: Townley is the Resident Futurist at Human Powered Solutions, an industry consultancy.

After listening to “Predictions For 2021 And 2022,” a webinar I presented for the NBDA at the end of February, BRAIN’s Steve Frothingham asked me the following:

“Is an inventory glut inevitable at the end of all this?

“How does the industry transition from ordering everything it can possibly get to something approaching real forecasting?”

“When will we know this transition is happening?”

“What would be your advice to suppliers, (bike brands, factories, component makers) to ensure the industry has a soft landing when the growth rate slows?”

At HPS we have bundled 2021 and 2022 predictions because the next 10 to 15 months are, according to our analysis, going to blend. The seasonality we have associated with the American bicycle business, and we have gotten perhaps too comfortable with, has been disrupted throughout the global supply chain.

Deja-vu! We are advising our clients that 2021 will be a lot like 2020 for the IBD channel of trade – until vaccines are distributed widely enough to stop transmission. Meaning for the health of retail staff and customers, we should observe social distancing, limit the number of customers in a store, wear masks and gloves … and be patient, respectful of shoppers and smart until the Center for Disease Control tells us differently.

Bicycle business supply chains will continue to be challenged in 2021 with the result that we do not anticipate an appreciable increase in on-demand inventory in the U.S. for most of this year.

We are also advising wholesale and retail clients to expect at least one more round of price-increases and further tightening of terms driven by increasing raw material, component, packaging material costs and ocean carrier and domestic freight rates.

These cumulative increases could become so severe that several price increases before the end of this year should not be ruled out.

The first waves of these cost increases in the supply chain have already worked their way through to increased retail pricing, and if additional retail price increases keep coming through the year, they may impact the market by slowing consumer demand – but this is still in the future and is a probability to be considered in ongoing risk assessment.

Between the fourth quarter of 2021 and the first quarter of 2022 we finally believe the COVID-19 crisis will be brought under control to the point that America and those parts of the world that constitute the bicycle and e-bike supply chain will open-up and industry, commerce and retail will be able to function without social distancing and masks.

Based on our current risk management assessments we are advising our clients that the end of 2021 into the beginning of 2022 will see a mixed economic recovery, impacted by weather, a topic for another time. The recovery will include some pandemic-induced changes in consumer shopping behavior that take hold permanently. Brick-and-mortar retailers, including bike shops, will have to embrace these changes to satisfy shoppers and customers as the supply chain struggles to find its footing as the Bubble Pops.

There are several “Bubbles” in the U.S. economy at the present, but the one we are most concerned with is the one created by the consumer demand for bicycles and e-bikes, and the supply chain’s ability to respond in the form of actual conversion resulting in delivery.

Our analysis indicates that what the consumer and trade press have been referring to as a “bike boom” in America, while a very real surge in demand, as measured in actual conversions and delivery of products … is not a “bike boom” at all. We do not want to get bogged down in debating this point now — although we will be happy to revisit it — because Steve’s questions have more to do with the supply chain than whether there is a “bike boom” at retail.

“Is an inventory glut inevitable at the end of all this?”

The short answer – Yes … an increase in on-hand inventory at wholesale and retail is the inevitable result of the current supply chain and replenishment, including forecasting systems currently in place in the American bicycle and e-bike business. The real question is: will building on-hand inventory result in a “glut” — and will that “glut” be at wholesale or retail, or both?

History indicates that most of the supply chain in the specialty channel, up-stream from bike shops, has relied on providing generous terms to encourage bike shop owners to ignore turns and GMRI and take in bicycle/e-bike inventory even if it meant using outside warehousing. This is what we would call a “glut.”

It has been a simple fact that based on NBDA Cost of Doing Business surveys, the typical (meaning the statistical middle) American bike shop has not realized a net-pre-tax profit on the sale of new bicycles in at least 15 years. Why? Because they are getting two or less annual inventory turns on new bicycles.

Right now, in 2020 through the present, because of the surge in new bicycle and e-bike retail sales we believe the typical bike shop is making a fair gross margin of profit, (net-pre-tax) on the sale of new bicycles.

“How does the industry transition from ordering everything it can possibly get to something approaching real forecasting?”

My experience and that of my HPS partners has been that forecasting in most of the American bicycle and e-bike business has been treated like a black-box, and the folks that are really good at developing their own methods or refining the methods of others to do forecasting are highly valued but normally relegated to a backroom or cubical along with the rest of the folks handling supply chain functions.

A common forecasting methodology utilized by management is to ask the sales reps and top dealers for their forecasts, which typically don’t work well unless modified and reworked by a really good forecasting person.

The trade association focusing on brands and wholesalers, PeopleForBikes, has a very real opportunity to hire and engage specialists to educate and train supply chain and logistics staff of its members in data analysis, “learning” metrics, risk management, predictive planning and the other skill sets that will help establish real forecasting throughout the American bicycle and e-bike business.

The NBDA already has a P2 program for bike shops to study, analyze and understand Key Performance Indicators, or KPIs and use this knowledge to develop better business planning and management, including forecasting.

“When will we know this transition is happening?”

Predicting the transition from high consumer demand to normal or low consumer demand is difficult if you are measuring consumer demand as accurately and as often as possible. PeopleForBikes is doing its best, but it is my observation that sufficient funding and resources are not being directed toward ongoing, primary consumer research to be able to properly address this question.

Unless the board of directors of PeopleForBikes really wants to know the answer to this question, the American bicycle and e-bike business will be guessing. It might guess exactly right, or it might not. Unless one of the big companies with the financial resources to properly study this question comes forward with a qualified answer, the bulk of the business will find out after it happens.

“What would be your advice to suppliers, (bike brands, factories, component makers) to ensure the industry has a soft landing when the growth rate slows?”

For the supply chain up-stream from retail we are advising carefully analyzing order demand compared to production and shipments for 2015 through 2019 and create a weekly and monthly graph or chart with a quantity and separate revenue scale and extend that forward for 2020 through 2021 and 2022 if lead times are out that far. Re-generate based on current order status every 10-days to two weeks and analyze for changes, and re-schedule and advise customers as needed.

Also, have your marketing and/or sales staff contact and talk to customers every 10-days to two weeks and ask about any changes in their on-demand orders from their customers and lead times. This information should be consolidated in a regular report no later than every 10-days to two weeks and cross-checked against the current order status and graphs or charts suggested above.

Bike shops should avoid holding more than six inventory turns of new bicycles based on 2015 to 2019 data and KPI’s. Bike shops should also investigate becoming members of the NBDA and joining a P2 Group.

There is no guarantee of a “soft landing” but paying close attention to company metrics and KPIs and the current situation and input from customers will help in making the landing as soft as possible, and hopefully, not bouncing.

HPS is a unique consultancy focusing on product development, sourcing, logistics and operations for its clients in human transportation and micromobility. To learn more visit humanpoweredsolutions.com.

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