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2021: Understanding the IT Distribution Landscape

Wed, May 5, 2021

It’s an exciting time to be in IT. With the supply chain disruption caused by the Covid-19 pandemic, demand is soaring, manufacturing is in high gear 

But with supply chains under pressure like never before, what’s next in the global supply chain crunch? And what does it mean for the IT industry? 

About a month ago I was driving home from work to Campbell’s Bay, Auckland, NZ. As I rounded the corner to Rangitoto Harbour, I got a surprise: there, in the harbour were seven container ships - seven – anchored, presumably awaiting unloading.

Even for a busy shipping hub like Auckland, so many cargo ships outside the port is something of an anomaly.  

Unlike most ports around the world, Ports of Auckland has historically worked on a ‘just-in-time’ model, with tight turnarounds and ultra-swift unloading of containers, usually avoiding the unnecessary inefficiency of backlogged boats.

Jump forward to 2021 and it’s a very different story.

Thanks to the global disruption of the Covid-19 pandemic - and the current surge in freight arriving by sea in New Zealand - the Ports of Auckland and Tauranga are struggling to offload at the pace required.

That delay is having spill-on effects down the supply chain of course, with delivery schedules everywhere, upset.  

So by sea, it’s bad. Unfortunately, by air, it’s worse.

A quick look at a flight radar will tell you everything you need to know: as of May 2021, there simply aren’t enough planes in the sky to satisfy global shipping demands. With airfreight capacity limited, prices are outrageous, recently hitting 4-fold increases on typical air freight costs.

And while we’re cataloging the world’s shipping woes, let’s not forget the recent $10b-per-day whoopsie of Ever Given, adding yet more insult to injury.

It’s the perfect pandemic supply chain storm.

The impact for IT in NZ and beyond

With worldwide lockdowns, there have been huge shifts in consumer spending patterns. Retail spending is surging worldwide. With commercial flights canceled en masse, consumers who can afford it are redirecting their holiday spends into shiny new at-home conveniences. We’ve seen surges in demand for consumer goods such as TVs, treadmills and new furniture.

Business expenses have changed too. Research from IDC shows the global PC market has spiked 55.2 percent year-on-year during the first quarter of 2021.

When lockdowns were first announced - and industry’s great shift towards remote working got underway - demand for affordable working devices has soared. Desktop replacement lifecycles are being brought forward as IT departments embraced the move to entry to entry- to mid-level notebooks.

Component shortages

As for the IT industry, the Covid-19 Pandemic has accelerated the move to new, more agile ways of managing supply chains.

In the immediate moment, the challenge is now about negotiating difficulties around component availability. Currently, we’re seeing an additional month of lead time, taking many sea-freight lead-times out to 12 weeks or more.

That’s creating pressure for manufacturers, some who have seen almost 50% increases in the cost of components. While the New Zealand dollar is strong, and many vendors have so far managed to ride the surge in cost, those increases will ultimately end up being handed on to the consumer.

In the age of Covid, being able to supply is more important than hitting stock turn metrics. Many have increased their stocking load with vendors - placing bigger orders than they normally would - to avoid shortages. In many instances, suppliers are increasing order loads to hit rebate targets, even as manufacturers struggle to meet the existing demand.

Old algorithms are out the window as distributors change the way they forecast their inventory. There is a need for more mature stock forecasting, and those that don’t forecast well enough in advance will miss out.  

Clout matters

Manufacturing resources are being re-focused, with even basic resources, such as the glass used in Covid-19 vaccine vials, being redirected to factories working around the clock.

For the rest of us, resource allocation is based on who yells the loudest - or who places the biggest orders.

As significant chip and component shortages become a reality, market dominators have begun pressuring suppliers for priority deliveries. Factories in China that manufacture multiple products are favouring their biggest vendors - with smaller brands simply missing out.

Simply put, big brands are winning the covid race.

Rebates: Great(er) expectations

For many vendors, it’s been a bumper financial year, and they’re looking to maintain their sales numbers. To do that, they’re leveraging rebate incentives, often using 2020 as the benchmark to calculate targets for the next financial year, in the hopes of continuing their upwards trend.  

Is this fair? It depends on who you ask, but regardless, tighter rebate targets are creating demand for better pricing tools, especially more accurate business forecasting software.

But while bigger vendors can afford to be inflexible with their rebate programs, smaller vendors are responding to the uncertain market with flexibility. In 2021, bigger brands insist you play by their rules, but there’s still plenty of room for negotiation with smaller names.

Planning for 2021, preparing for 2022

So, based on what we know about the current supply chain landscape, what can we predict about the future? I’d like to hazard a guess or two for 2021.

Firstly, when the borders open again, consistency in stock availability will still be the challenge of the moment. It’s simply a numbers game, the more planes in the sky the more efficient the supply chain becomes. That will take a while to stabilise.

Secondly, for all vendors, sales will remain the number one focus, with margin concerns taking a back seat. Expect deals to be done.

Larger vendors won’t pull their rebate programs back to previous levels any time soon. However, vendor strategies will continue to diverge based on size, with smaller vendors changing prices in response to market forces, and larger vendors locking in their preferred pricing.

Finally, disruption is high but so is demand. For the short term at least, expect the current shipping challenges to continue.

To help you navigate these increasingly complex supply chains, we’ve put together the following on-demand webinar – Maximise Margin Through B2B Supply Chains - covering discounting, delivery, logistics, rebates and more.

To watch this on-demand, click here.

About Flintfox

At Flintfox, we have over 30 years of global experience in helping businesses master their supply chain. We also create pricing and rebate software built to power manufacturing, distribution and retail enterprises.