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WEBINAR: THE DISRUPTION DILEMMA

January 24, 2023

2022 brought relentless supply chain disruption: volatile demand, excess
inventories and record-low warehouse and transportation capacity. Inflation and
macroeconomic risk promise to make 2023 even more unpredictable.



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Supply chain experts from Flexe, Prologis, Columbia Sportswear and Uber Freight
discussed the coming year in supply chain. Hear their thoughts about 2023
predictions, supply chain challenges, trends and how to navigate an uncertain
future.


KEY TAKEAWAYS

 * Disruptions are more transformative and frequent
 * Covid made channel expansion necessary. After Covid, new channels like BOPIS
   remain permanent fixtures. Leading brands shape demand across channels
 * Recency bias skewed 2022 forecasts. Now, economic variables upend business
   cycles making future forecasting difficult
 * 2023 plans may be baked in, but how a brand operates isn't. Leading
   businesses use supply chain agility to rapidly adapt

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Flexe edited the transcript for brevity and clarity.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

2022 brought relentless supply chain disruption, volatile demand, excess
inventories and record low warehouse and transportation capacity amid increased
inflation and macroeconomic risk that promises to make 2023 even more
unpredictable.

Today, Flexe brought together expert panelists from Uber Freight, Prologis and
Columbia Sportswear for a lively discussion. And what you can expect to learn is
predicted 2023 disruptions in warehousing, transportation and consumer
behaviors, as well as methods for deciding where to invest during disruption,
disruptive periods and supply chain strategies to increase speed, agility and
scalability.

So let's get started by getting to know our panelists, starting with you, Mazen.
Tell us who you are, what you do, and what surprised you in 2022.

Mazen Danaf, Senior Economist, Uber Freight

Hello, everyone. I'm a senior economist at Uber Freight. I track the key supply,
demand and economic indicators in general and develop forecasts in this volatile
environment.

The most surprising and humbling thing for me was the speed at which the current
Omicron outbreak happened and then disappeared. We were seeing about 1 million
cases per day in January 2022, which was an unimaginable number. That number
basically went to zero a few weeks later, in early March.

What happened in January crippled our economy and that cripled our ability to
forecast as a nation. If you look at the transportation sector, we went from the
most undersupplied market to the most oversupplied market in a matter of weeks,
and prices were at a record high. And then suddenly, they had the most violent
drop we've ever seen.

Karl Siebrecht, Co-founder & CEO, Flexe

Hi, everyone. I am one of the founders, and the CEO of Flexe. Lots of things
were surprising about last year. I know, we’ll get into that here as we keep
rolling.

Melinda McLaughlin, SVP, Global Head of Research, Prologis

I'm Melinda McLaughlin, the global head of research for Prologis, the global
leader in logistics, industrial real estate and warehouses. There was so much,
but maybe one big surprise was how quickly things changed. People were ready to
get out there and spend, which kept inflation high and the Fed responded. It all
happened much more quickly than we've seen in many decades.

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

Hi, Jason Trusley. I lead consumer strategy insights and analytics for Columbia
Sportswear. You'll know us through Columbia, Mountain Hardware, Prana, Sorel. I
continue to be amazed by the resilience of the consumer globally.

They just keep coming back to support economic growth, to support business
growth. And if you're creating products, brands and experiences that matter, the
consumer marketplace is a great place to be right now.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

We are going to start by taking a look back at the data, the disruptions in
2022. What can we learn from in 2022? What are a few numbers and stats that
stood out to you in 2022? What do people misunderstand about the stats they saw
in 2022?

Mazen Danaf, Senior Economist, Uber Freight

First, I’ll echo Jason, In 2022, we saw resilient demand both on the consumer
and manufacturing side. But, to answer your question, when we saw the collapse
in prices in the transportation sector, everyone was focusing on the demand
story. They assumed inflation was taking a toll on consumer spending and
impairing our consumers and businesses as well. However, we didn't see that when
we looked at the data.

We saw spending was at a record high (except for Q4), and manufacturing output
was also at a record high. People didn't focus on the supply story. There were a
lot of supply swings, especially in the transportation and freight sector, which
drove the significant changes we saw in the market. We saw a record increase in
trucking employment, 5-6 million TEUs entering the market in the next two years
and excess inventories. There was a huge supply overaction that was masked by
Covid. When Covid disappeared it showed up all at once causing disruptions in
the supply chain.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

What are some of the data points, or what are some of the data points that
didn't hit the newsreel? What was happening that we weren't really talking
about?

Melinda McLaughlin, SVP, Global Head of Research, Prologis

One thing that we learned is that there are different degrees of capacity
constraint at every step of the supply chain. It can be as big as the workforce
or as small as a chassis. And, there are so many interlinks.

One thing that wasn’t well-covered was the warehouse space. When inventories
build, you need more warehouse space. When sales build and inventories are
moving quickly, you need more warehouse space. And, it's becoming harder and
harder to build it. It’s tough to bring online, so we have huge capacity
constraints. The way we measure that is the vacancy rate and it's down to 3%
this year vs. 4.5% pre-pandemic and a 6% historical low. Space has never been
more scarce.

The one that’s well covered but I wanted to underscore is what happened after
Russia invaded Ukraine with energy costs. It’s really a story of volatility. In
Europe, at one point operations were paying 10X for their energy. If that big
portion of your supply chain cost stack can be that volatile, I think it will
influence business decisions for years to come.

Sarah Barnes-Humphrey

At the end of last year, we heard about possible rolling blackouts. With you
being in the warehouse sector, what are you hearing on that front and what
should supply chain professionals be aware of?

Melinda McLaughlin, SVP, Global Head of Research, Prologis

We have businesses in Europe and so far we’ve been lucky with the weather. We
haven’t experienced rolling blackouts yet. Customers had to ask themselves,
“when do I run my operations, especially manufacturing activities. They were
trying to front load that activity to avoid running energy intensive operations
when costs are at their peak.

Demand for renewable energies soared. We went overnight to having hundreds of
calls about spaces with solar and do you have ways for us to be more efficient.
Companies who were already well positioned with those operations naturally
reaped the benefits.

It's part of the decision making and the collective knowledge now. What we're
looking at as far as risk, like where are we spending our risk dollars because
that also can affect manufacturing, you know, in the Far East as well with those
rolling blackouts. And that's going to affect the supply that we're getting and
the shortages that we're seeing on some of the shelves as well.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

So I want to turn to Jason and talk about some of the consumer consumer
behaviors that you saw in 2022. What were some of the unexpected behaviors and
what were the learnings from that?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

Well, I think I think it's fair to say that the the most unexpected finding is
the resiliency that I talked about in my introduction, whether that's demand,
whether it's patience around waiting for the next deal to show up, all those
things are abundantly clear that the consumer is adopting this sort of
transitory stance in virtually everything that they do.

And if I go back to the start of the pandemic in April of 2020, what are we
going to do to transform operations, to create new experiences, to create new
capabilities BOPIS, pickup in-store, all those sort of things. Everybody's
digital transformation agenda. We went forward five years and we talked about
this a lot.

I've probably been on 20 calls where everybody said, Oh yeah, my agenda is five
years more mature than it was. Well, I don't know if that necessarily stuck. I
think consumers are beginning to go back and question how many of those things
that we created that our new offerings are really the ones that they want to
continue engaging in.

And I'll look at the holiday season. Brick-and-mortar did surprisingly well in
the marketplace over the holidays versus digital retail. That isn't just true
for my industry. If you look across all apparel footwear, you look across
electronics, you see it there. There's just this sort of focus on brick-and-
mortar and the way things had been before. I think that this is part of a
broader trend that we're seeing in the marketplace.

The topple rate of retail business models for consumers has doubled every two
generations. In this era, there's an evolutionary process called punctuated
equilibrium. We have long periods of status quo and rapid periods of change.

What we see in the data, what we see as sort of a consumer behavior as looking
at the marketplace, is that periods of rapid change are much deeper in the depth
of their change and much closer together. That isn't going to go anywhere.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

What were some challenges you were hearing from your customers in 2022?

Karl Siebrecht, Co-founder & CEO, Flexe

The difficulty of forecasting. It was a particularly difficult year to forecast,
and there were at least two drivers of that. The first is continued
Covid-related disruptions. On top of that, consumers' needs, wants, desires
continue to evolve and that's not going away. That's always going to happen. But
you pile that on top of the fact that we have these core supply and demand and
demand disruptions, which has made it incredibly difficult to forecast.

One of the significant challenges has been related to that has been inventory
levels. For a while there, there wasn't enough. In one of the first ripples in
the bullwhip, suppliers shut down, transportation lanes shut down. We ran out of
inventory. Then when that opened up, most retailers made the bet. I've got to go
buy the inventory to make sure that doesn't happen again. And many of them have
ended up in a position of too much inventory.

I'll give an example. You know, on top of sort of how much overall inventory do
I need? We've heard from customers that say, well, then when I get into my
actual distribution network are things like BOPIS, you know, Jason mentioned buy
online, pick up in store.

Was that a temporary blip that was driven by Covid? Or is this a durable ongoing
distribution channel that's going to continue to grow over time?

You know, I don't have a crystal ball. I'm not really sure. I know that a lot of
research suggests that consumers value it. The economics to retailers are pretty
good. But the way that has manifested itself with our customers is, hey, if
BOPIS is growing, that's great.

But you may find yourself stocking out in your retail stores more quickly
because you're pushing more product through each physical footprint. So what
does that mean? I've got to replenish more rapidly. Maybe I was on a weekly
cadence.

Now I need to be on a two day cadence with my fastest moving SKUs. So the
implication is I've got to change my distribution network. I've got to typically
add new distribution sites, at least for my fastest moving SKUs, kind of to
forward deploy that inventory out further into the market.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

And bringing warehouses closer to that end consumer. That was something that I
was hearing a lot about in 2022. Melinda, just before we get to you, I want to
ask, Karl, are you hearing more just in case versus just in time?

Karl Siebrecht, Co-founder & CEO, Flexe

There's been a lot of just-in-case starting last year that rolled into very high
levels of inventory this year. And so now, for many, we have all this inventory.
Do we want to discount it and move it through? Do we want to save it and
hopefully we can have this be next year's trend? You look at the public reports
of major retailers, and inventory levels remain high as we sit here today.

Karl Siebrecht, Co-founder & CEO, Flexe

I want to know what Jason thinks about this: once you introduce an option, can
you take it away? Like, can you say, we're not doing BOPIS anymore?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

There is an appreciation for the different consumer profiles now, and that they
want these different experiences. I think retailers really have to plan for all
of it, right? So you can't take it away once you've introduced it. Yeah, I think
that's right. I think the consumers finding your brand often come through many,
many different channels. They come through marketing, they come through the
product and seeing the product on people that they want to be like. They want to
be part of that.

And for some it's just about convenience. And so I'll take my industry as an
example. Everybody went outdoors during the pandemic, and most people, like in
the US, about 25 million additional people go outside versus 2019.

Now, a lot of those consumers came in from Columbia or North Face or Patagonia
or whomever because of the new offerings around convenience. I can get this
product in a convenient place for me. At the time, I wanted it in the place that
I wanted and inventory was relevant and in the end product was clicking really
well in the marketplace.

I don't think you can pull those things back at this point. I think it's now
about how do you use the demand creation levers that are available to us to
shape demand into those channels, which by the way, there's not a capability.
Most companies have spent a lot of time thinking about and around distribution
shaping rather than how to use marketing to create differentiation.

So I think that's going to be one of the things that we continue to struggle
with in the industry across all formats of retail. How do I shape demand
differently? Especially if you go back to the fundamental problem of forecast
accuracy.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

Let's talk about forecasting accuracy and how it's been a challenge in 2022.
What can we learn from what we saw in forecasting accuracy in 2022?

Mazen Danaf, Senior Economist, Uber Freight

I wanted to touch on two reasons that led to forecast inaccuracies in 2022. So
the first issue is that we saw complete outliers in 2020 and 2021. These two
years are complete outliers and because of our recency bias, we thought things
would continue the way they were. That was the first mistake we made.

What you're seeing now is regression to the mean, where things are starting to
go back to their long-term trends. There is still an effect of these two years,
but they’re not what we thought they would be.

Secondly, it’s that sectors also operate in cycles, and we still fail to grasp
the idea of cycles. And when we overlay economic variables and economic shocks
on top of cycles, things get much harder to forecast in comparison.

When you look at like most of the forecasts, they're either straight lines like
linear forecasts or even worse, they're just exponential forecasts that show
growth forever. So this is what led to a lot of the inaccuracies in forecasts
and the supply overreaction.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

But now it's time to get out that crystal ball and look at 2023 and beyond,
providing some insight into 2023 predictions and how to make investment
decisions in today's wildly uncertain world, which we've just been talking
about.

Jason, start us off. How do brands figure out whether something is a trend or
worth a long time business investment? What are you and your teams particularly
focusing on in 2023?. What are you and your teams mainly focusing on in 2023?

Jason Trusley VP, Consumer Strategy, Columbia Sportswear

The planning cycle for investments is a 12-month process. And so we're now
beginning to think about what will happen in 2024 with the need to also manage
through and perfectly execute 2023.

I think about how supply chains have been primarily an efficient execution
engine for the consumer for a long time, and it's becoming much more experience
based. And so putting those investments at the front end of the supply chain,
assuming that a lot of the underlying mechanics are built, but most importantly,
is because we don't know what we don't know.

Sarah Barnes-Humphrey, Host of Let's Talk Supply Chain

How do you find mechanisms to create an agile process and workflows?

Karl Siebrecht, Co-founder & CEO, Flexe

Covid was arguably a silver lining. It was such a dramatic disruption. It put
this spotlight on the need to make supply chains agile and start to really shift
from a mentality of cost, cost, cost, risk reduction, risk reduction to growth.
It's doing something brilliant and differentiated for consumers by turning it
more into a growth lever than a cost lever.

I think it also started to shake us out of what was kind of a fantasyland of
believing that we could predict the future. We just need to be really realistic
about how much we can predict and what's the error around the forecast and in
particular.

When we pay attention to time horizons, the longer the time horizon, the more
likely it is that there's going to be a larger risk factor or larger error
factor in your forecast. It just is what it is. So Covid I think, has helped
more and more people understand the reality of our ability to forecast.

And I think that so now going to your question, will, how do we do that? I think
one answer is to continue on this journey of digitization. Agility is really
about the ability to make. Good decisions faster and in digital infrastructure
when applied right or applied well can lead to that. There are other models in
logistics and beyond logistics to sort of start to incorporate flexibility as an
ongoing mechanism in your portfolio of infrastructure.



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