Episode 203: Our Supply Chain's Future| Jeremy Lott (SanMar), Chris Anderson (HPG), CJ Schmidt (Hit)

Welcome to Skucast, the podcast for entrepreneurs in the promotional products industry. Skucast shines a light on our industry's best work, features maverick personalities, and discusses what's really involved in running a modern promotional products business. Skucast is the official podcast of Common Skew. In September, we hosted our annual bootcamp experience for entrepreneurs called Skew Camp, where many of the industry's market leaders, challenger brands, and entrepreneurs gathered for a few truly magical and inspiring days at the Ace Hotel in Palm Springs, California. Now, at the event, we hosted keynotes and panels and breakout discussions on some of the most challenging issues and unique opportunities facing our industry. One of those discussions was the session, Our Supply Chain's Future, and it was an interview hosted by Kathryn Graham, Commenscue's CEO, who chatted with 3 leaders of the largest suppliers in the business. Jeremy Lott, President of SanMar.

It's really hard. Projecting the future is kind of what we do as a business, and it's never been this hard before.

Chris Anderson, CEO of HPG.

As far as raw materials go, There have been so many, so many shocks to the system. It would be foolish of all of us to assume that it's going to be steady state from here on out, that it's going to be raw material whack-a-mole for the foreseeable future because global volatility is not going away.

And CJ Schmidt, president of Hit.

Be nice to the people that are working for us. The word grace comes to mind and the single mom that has two kids and one has COVID and they can't get them to school for the day. Those are the people that are fielding the phone calls and getting screamed at because they, they can really control what the container is doing. They can't control that, right?

Given the state of the global supply chain and the impact it has had on everyone in our industry, as you can imagine, this was a very tense and lean-forward conversation felt by everyone in the room. What transpired in that hour was not just a reflection on the difficulties we're facing, but as each supplier leader shared a glimpse into what it has been like in their world an opening of empathy, understanding, and a bridge of trust strengthened between suppliers and distributors. We felt it in the breakouts and in the way we opened up to each other throughout those few days. Today, we're sharing that interview with you here on the SkewCast. In this conversation, we hear from all 3 suppliers on the state of the industry now, the impact this has had on each of their respective companies, as well as the impact on themselves and their teams personally, plus their predictions on when we will gain some equilibrium in the supply chain. Hi friends, I'm Bobby LeHew, CommerceQ's Chief Content Officer. The day before PPAI Expo on January 9th, we are hosting SKUCon, the conference for innovators, explorers, and dreamers in the promotional products industry. Now, the in-person event is sold out, but SKUCon is also being broadcast virtually. So if you didn't get a ticket, we encourage you to join us from the comfort of your home, your hotel room, wherever you are. To be inspired by folks like Davis Smith, the founder of Patagonia, design legend Aaron Draplin, and many more. Virtual attendees will also get exclusive interviews that the live attendees won't experience and even one-to-one network. So we hope you'll join us. And most importantly, we hope you'll bring your entire team so you can kick off your year and get on the same page as you head into 2022, because we're going to celebrate and inaugurate your best year ever. Together. You can register for the virtual conference at skucon.com. This episode is brought to you by Commonsku, the work from anywhere platform that powers your connected workflow, enabling you to process more orders and dramatically grow your sales. To learn more or begin your free trial now, visit commonsku.com. Now here's Commonsku's CEO, Catherine Graham, interviewing SanMar's Jeremy Lott, HPG's Chris Anderson, and HITS' CJ Schmidt. And one technical note, there's a little bit of feedback in this recording, but we thought the conversation was so important. We still wanted to share. Here's the session, Our Supply Chain's Future, recorded live from SkuCamp.

So we saved one of the spiciest topics for after lunch to keep all of you awake, supply chain. The individuals up on the stage need no introduction, but just in case you've been under a rock, Jeremy Lott, the president of SanMar, CJ Schmidt, the president of HIT, and Chris Anderson, the CEO of HPG. So let's get started. Jeremy, you can kick us off. We use the word supply chain as if it were this monolithic thing, when in reality there are many, many, many supply chains within even just the apparel world when you peel back the layers. Help the group here understand a bit about kind of what that complexity is. You could use like a t-shirt as an example in terms of how that peels back.

Yeah, thank you. So, and please cut me off if I'm going too long. So we manufacture in 23 countries today around the world in pretty much every region in this hemisphere, in both North and South America, in Asia and Africa. And in each of the regions, the supply chain is quite different. So let's take Central America, for example. We buy mostly U.S. yarn. That we send down to— using U.S. cotton, U.S. spun yarn, we send to Central America that we knit, dye, cut, finish into t-shirts and bring it back and sell it here. That might be quite different than a polyester performance t-shirt that might use Taiwanese chip that is extruded in China and knit and dyed that is sent to Madagascar where it's cut and sewn and brought to the United States. So those supply chains are quite different in terms of, you know, how they're structured and how they're put together. And those are just kind of two examples. But throughout the last year, the thing that has been consistent is that some of them have worked and some of them have not worked, and that has shifted kind of over time. You know, we woke up yesterday to word that they're having power challenges in China today. And so the factories that are extruding the yarn and making sure it's there aren't operating because they don't have power to run the factories. So right now, South Vietnam is shut down for the most part for factories. So it's this really diverse supply chain that we have, or really many supply chains that we have to make product. Throughout the last year and a half, like I said, some have operated well, some have really struggled, and that's moved over time. It's absolutely a moving target.

CJ, on the hard goods side, I think most distributors have been focused on product inventory as being the key issue. But there are an equal number of kind of upstream and downstream challenges. So corrugate shortages, ink issues, obviously labor has been a huge issue. Talk through some of the challenges kind of beyond product inventory that's causing issues.

Sure.

Corrugate has been an issue for a minute now, and we literally didn't have enough boxes to ship our product back out for a week period. So I think we have to reuse the box.

So that happened.

So that happened, yeah.

And we try to reuse a lot of the boxes that come from the various countries we import from, but the challenge we have there is we're not the brand, you're the brand. So in many cases, Pitt's written all over the box and certain people get, and maybe some in this room, get a little bit defensive and they've worked so hard to build their relationships with their accounts, etc., that they don't want that Pitt logo on there. To know where the goods have been purchased from. About 60 days ago, we got the ink bomb that some of our inks were going to be cut short to the tune of about 30% of our supply. That's varying on various products. The main one right now is silicone, so like a silicone wallet. We just launched those, I call them very stupid push tab fidget spinner type deals. Very stupid. But it's the hot thing and we do fairly well with them and we have a limited ink supply there. So what did we do? We bought material and kept that in China and hopefully they had enough ink to support us and print it there and now the power shortage issue comes into play. Silicon went up 1600% yesterday on purchasing in China. So yeah, it's just a comedy of errors here and we try to get ahead of it, we try to make bold purchases and have enough inventory accordingly both on product and on corrugate, inks, screens, etc. And it's just a ripple effect, so to speak.

So Chris, there are multiple categories that are constrained right now due to the complexity of the supply chains on the hard goods side. So chip shortages, shipments of dangerous goods are a challenge. Provide a bit of insight there in terms of what you guys are wrestling with.

Well, for us at HPG, it's really been one of my favorite analogies, in fact, over the last year is that You come up to a crosswalk, you look left, you look right, it's all clear, walk across the street and get hit by a plane falling out of the sky. So that's— I started this year with a full head of hair, and, uh, it, it comes down to supply chain generally. But for us, and I see a couple others in the same boat— yeah, exactly. So the, uh, the complexities, it's affected almost every corner of our business. And as I've talked to industry peers like CJ and Jeremy, there really hasn't been a category that's untouched. We came into this year expecting chips to be the biggest bottleneck in our industry, and we've certainly seen that. But there's not a raw material category— I mean, you look at the silicone example— that I can name off 8 other silicone-like categories that have been impacted. And it's affecting our ability to not only decorate orders in the U.S., but going upstream as I visit our suppliers either virtually or now more recently able to see them in person. What we are seeing is really the need to get creative because I could go through the categories one by one and bore you with my encyclopedic knowledge of what we don't have. But instead, it's really been a matter of then getting creative and challenging upstream, just as we're challenging ourselves on, all right, well, what are you going to do about it? And what are your plausible alternatives? And in turn, how do you communicate it? And that's really been for us over the last several months the only way out of this thing, because I don't have a silicone mind. I don't know if you have one, but if I did, I'd let you know. But the bottom line is that quite often these are global shortages, and a global issue is going to require a local solution if you want to remain viable to your customers. And that's really been for us, again, that airplane that falls out of the sky. Dangerous goods was perhaps the biggest anomaly. I don't know how many of you are aware of what happened there, but essentially in a dark, cigar-smoke-filled room, the Five Families of the freight cartel got together and decided that we're going to deeply, deeply constrain our shipping lanes and kind of on a whim, we're not going to allow dangerous goods to be accepted. Well, dangerous good is a fairly broad category. A flashlight, an iPhone, and pretty much everything in between could be considered dangerous good. So paradoxically, we had to put them on airplanes. So these products that in big letters say cannot fly on commercial airliners, they're that dangerous. They're okay to go on an airplane, but not okay to go on a shipping container on a vessel with 8 people on board. So that's been the type of paradox that we've been dealing with on the supply side for the better part of the last 18 months. And on top of that, what we've also seen, this is another one that blew me away. I went down to the Port of Long Beach and literally saw the container ship sitting out waiting to come in. And you would see a container ship come in and they said, watch what happens. They unloaded the containers, but they didn't want to spend the time because they were past due to get back to wherever their originating port was. So they left empty. Well, what does that mean in terms of container availability? And we're seeing that same thing, that a container that used to cost $6,000, $7,000 is 4 or 5 times that. Those are two examples again of airplanes falling out of the sky where I would have never— if you would have asked me two years ago if I paid $23,000 for a container, I'd say maybe in 2052.

So don't just look left and right, look up too when you're crossing the road.

I wish vessels would fall out of the sky.

Amen.

So speaking of paradoxes, Jeremy, there's this incredible tension right now between needing to make kind of big bets to manage inventory challenges. So SanMar's brought in 50% more product in Q3 than ever before in a quarter, which is mind-boggling. Juxtapose that with wild swings in demand. You know, who would have ever thought you would see demand for button-up dress shirts go to zero during COVID So just how do you manage that tension?

Yeah, so, you know, I want to make sure, at least from a SanMar perspective, the challenges we face today aren't just a supply chain. Challenge. Like, we are actually importing a huge amount of goods. We have more containers on the water than we've ever had before. We are inbounding more goods than we've ever had before. And we've had to get exceptionally creative to kind of figure that out. We've had to pay a lot more to figure that out. But we've dug ourselves a really big hole from 2020. And so when, you know, you've got to almost go back in time from when COVID hit and we had inventory coming in for months and I had sales going close to zero., and every projection I had said, well, we're going to run out of cash and go out of business. We stopped ordering because we had so much inventory. That was our challenge. Well, you know, over time, that inventory sales kind of picked up. By the time we started ordering again, uh, and sales really picked up in like the fourth quarter of last year, we had kind of dug this inventory hole. The wonderful piece of today is that demand is really strong. I mean, we are selling at really an incredible rate, and I'm bringing in an incredible amount of product, but not enough to replace kind of that hole. So I've got to not bring just bringing in what I'm selling, I've got to bring in what I'm selling plus, you know, enough to kind of dig myself out of the hole that we have today. And I'm bringing in a lot, but the constraints that we're facing around yarn availability, around other things, have just made that hard for us to do. And so it's really hard. Projecting the future is kind of what we do as a business, and it's never been this hard before. I think our philosophy today is to try and be as aggressive as we can around inventory. And so anything we can do to buy ahead, to do things to make longer-term commitments when that's necessary, whether that's to yarn vendors or anyone else, like, we are trying to do that, but in an environment that's still really constrained. And so I think our approach is to be really bullish, but it is going to take us a while to get not only the inventory we have, but to build back to kind of where we were from a depth of inventory perspective. And that's not going to be till sometime in the middle of the late next year. I mean, it's going to take us a while to get back there.

Chris, pricing is moving all over the place. That silicon example was super interesting. How much do you think current price fluctuations are kind of a function of the disequilibrium in the supply chain or inflation, or are kind of higher prices here to stay?

But we know that the 4 riders or 3 riders of the apocalypse of today's pricing are freight, labor, and raw material costs. And what we're seeing on each one of those fronts is a degree of resilience that I wouldn't have expected in terms of the upward pressure. On the freight side, we've already talked about that, that I'm still waiting for the 5 families to come together and give us some relief. But that doesn't appear to be happening, at least for the rest of this year and almost almost coterminous with Jeremy's timing, likely mid-next year before I'm hearing any sort of relief on freight. On the raw materials side, those are commodity-based, and so there is going to be relief at some point, category dependent. But on the labor side, it's here to stay. There has been a profound shift within our economy, and as a result, the need to raise prices is largely dependent on your ability to manage all three of those. And we know that, for instance, with freight, unless you're gonna start your own Jeff Bezos-like delivery system, you're held hostage by the freight carriers. Raw materials, unless you've got that silicone mine somewhere, you're gonna have to build that into your equation. So then it comes down to the productivity of labor, and where we're going to see companies either rewarded or conversely punished is based on their ability to get more efficient on the labor side.. And that in turn is what is going to reflect in their pricing. That the real winners are going to get more creative with the way they produce and bring their goods to market in the face of fluctuations on the labor side.

So the quick summary of current state is a total shit show. And let's shift gears into looking at the future. CJ, let's talk about what role technology plays in dealing with some of these supply chain challenges. So Hit and Eric Schoenberger, your COO specifically, have invested a huge amount of time and effort in Promo Standards. What impact are you seeing that have on your business right now?

First of all, I wore this long-sleeve shirt for Jeremy today. I bought one from him. So Catherine and Bobby and I talked prior to this, and it's the most profound effect, and you guys need to realize that. That our business has right now. There's inventory issues, there's order entry issues, there's art issues, etc. That shouldn't exist in this room if you're using the proper procedures. And it's just— I can't tell you how important it is. Your order that there's 85 pieces left of a certain bag that we have, you're getting live inventory when you electronically submit that order. That's automatically guaranteed towards you where Joe's distributor in Tampa cannot— doesn't have access to that and is not given the same benefits that you are. So the amount of legwork that we all put into this is— I just can't begin to tell you how important it is. If you're not using it, I strongly, strongly encourage you to get on board with what they have to offer. It's the best of the best in the technology that we've seen. I'm talking about how you're submitting orders to us accordingly via promo standards, that CommsCue's done the homework work for you and their team. It's, it's just super, super important. And as we're saying with labor issues that we're having, it takes the human element out of the equation as well. We don't have to hire 4 people that we had to possibly let go during the challenging times during COVID bring them back, train them, etc. The computer talks for you. I just don't know another way to put it.

It's super important. Jeremy, let's talk about resiliency. Specifically around redundancy and dual sourcing. So the apparel industry is hugely exposed in Honduras, where climate change has the potential to have a devastating impact. Explain what redundancy and dual sourcing are and what the implications are to those kinds of decisions.

So I think if you're like a chief supply chain officer for almost any type of organization today, like building more resiliency into your supply chain is a key piece of kind of what you're thinking about. This was a really crazy year. In November, you had 2 hurricanes within 2 weeks of each other that hit Honduras. And you have a very small area in this town called Choloma that's just outside of San Pedro Sula where Gildan's major factories are, where our major factory is, where Fruit of the Loom's major factory is, in like the size area of like the Ace Hotel. I mean, it's like this unbelievably small town where you have this huge concentration of production. Gildan's factories flooded. It wasn't as much a wind event, but it was a rain event. We're still feeling the impacts of that as an industry, of their recovery from those floods. Today, we do a lot of production in Ethiopia. Ethiopia, you may have heard, had a little civil war, and they have some tribal conflict that exists between different ethnic groups in the country. They're most likely going to lose AGOA status at the end of the year. AGOA allows us to use third-country fabric and bring it into the country duty-free. So we continue just— if you are in the apparel manufacturing business, you don't manufacture in like Switzerland. It's not where you go. You are in unstable countries. So some of these things aren't new kind of to us. But COVID and the last couple of years is very much highlighted for all of us how we think about supply chain and building more resiliency into it, dual sourcing in different countries and different regions. And continuing to build because we will always have challenges in the countries that we manufacture in. I'll add on the price thing, I had two things to say. It was, those things are all true, but labor at the factories continues to go up. So you are seeing in manufacturing countries like Vietnam continual inflation in the price of labor. So it's not just labor in the United States. Currency is a huge one. The currency, the dollar has devalued with as much, you know, as the government has that's kind of printed over the last 2 years. And finally, trade barriers for 30 years went down. Trade barriers have moved up, and you've seen that with the China tariffs. You've seen that with GSP preference that didn't get renewed at the end of last year. You're seeing— so trade preferences is a huge piece in terms of duty. So we are— there's like, he had 3 or 4 horsemen, like I've got 7 horsemen on pricing. It is an exceptional challenge. So it's a huge piece of what we're thinking about now as we think about the supply chain. How we make sure we build as much resiliency into it. And for that, for us, that means building redundant sourcing globally.

And I want to add to that, that on the textile side of things, when the previous regime put in the tariffs, we were— a bunch of us were doing the right things anyway and kind of diversifying our supply chain— Myanmar, Vietnam, Bangladesh, etc. Well, we've done that now, and now there's a political unrest in Myanmar where we're importing most of our bags out of. Now we've converted that over, now have to go back to China, and we now have to pay 47 upwards to 60% duty on that product. So it's just a vicious cycle. We try to do the right thing, we move all the cotton out of China to avoid the slave labor that's going on there, and we move that to India or to Bangladesh, and then COVID hits there severely and you can't get the goods out of there. And then the shipping lanes still move through China, always. So no matter where we move the product to, the shipping lanes still go there, so that delays it 2, 3, 4 weeks, etc. So there's just so many moving variables in those equations.

It's like whack-a-mole.

It is. So, Chris, HPG made a number of reshoring and domestic sourcing and production decisions recently. So with the acquisition of Webb and the launch of Batch and Bodega, speak a bit about kind of how domestic production kind of plays into the overall strategy for supply chain diversification for you guys in resiliency?

Yeah, well, it's certainly been a concerted effort on our part, and a big part of it was just simply that when the 2018 tariffs first came about in 2019, it was a wake-up call for a lot of companies, and we were certainly among that class. The vast majority of our goods were, if not fully manufactured overseas, components were at the very least, and it laid bare just how reliant we were. And it's not that this is a 100% onshore scenario. To CJ's earlier point, most paths still lead through China in one form or another, particularly in hard goods in 2021. And it's more of a matter of picking the spots where you can bring global efficiency to a category. And in our case, We looked at personal care as an area where if we were to properly capitalize a facility and bring about essentially the domestic manufacture of personal care products, so lotions, soaps, etc., we could compete on a globally efficient basis. And the reason I keep hammering that global efficiency is that as much as there's a degree of patriotism within everyone here for the US or Canada, there's still the economic reality that our end user is going to discern between an onshore versus an offshore product. And most of what we've seen is not necessarily in the affirmative of that. A little bit more over time, but it ebbs and flows, and particularly during less expansionary economic times, the lowest cost provider is going to win. And so what we've had to do is balance those two, that what are the categories that we can responsibly onshore in terms of the math. Because I'm often reminded by Kim, our CFO, Chris, it's just math. And so we start with that math and then work our way backwards as to whether or not it's feasible. And Batch and Bodega is another prime example of that. Batch and Bodega, we not only onshored it, we went to micro-enterprises. And that is, it's like whack-a-mole on steroids. When we're dealing with these micro-enterprises. I mean, you're enjoying the pretzels and the other products that they make, and they're delightful. And that was the whole idea, to create a bodega-type assortment. But at the same time, it created its own complexity. All that is to say that what we found is that there is no silver bullet necessarily. Not every category can be onshored, but we've seen nice dividends where we pick the right spots, the numbers make sense, and build the right story around it. But it has to be with those elements together. The Batch and Bodega, if it was just simply another food brand, well, you have access to plenty of food brands. So certainly increased our degree of difficulty, but there was a reward at the end of it, and usually that's the way that life and business work.

So translation, future production is still a shit show, but they're doing a lot of it. Let's shift gears to sustainability. So there's obviously been a huge amount of discussion about this prior to COVID, but I think COVID has accelerated a lot of trends, particularly around when we saw the cancellation, you know, of events and kind of mass giveaways and the move towards kind of higher-end, more expensive product. Jamie, let's start with you. So apparel and cotton have been a big topic for many, many years kind of in the sustainability area, and SanMar has done a lot around this. Can you speak to where you are doubling down and what decisions are being made differently from a supply chain carbon footprint perspective?

I think about it a few ways. There are eco products or green products, and then there's a sustainable supply chain. The eco and green products are great, and we're continuing to add and invest in those. My favorite is the Re-Tee that we brought out that's a fully recycled t-shirt. That's a really cool product. Actually, my bigger focus, the thing that I'm most interested in, is how we add sustainability across our entire supply chain. The really cool thing is that there's a lot of innovation happening, especially at the fiber and fabric level today. Our textile facility has the largest solar installation on roof in Central America. We use biomass to generate electricity at that facility., we're using a lot more pre-colored yarns. So if you think about like polyester yarns, instead of being extruded, knit, and then dyed, it's actually the chip is being colored. And so when you extrude it, it's already that color. And so you just knit it and you don't have nearly the, the water and the electricity usage when you're doing those products. So there's a lot of really cool innovation happening around sustainability. We're a member of the Sustainable Apparel Coalition, which is a really neat organization that actually Walmart and Patagonia came together to start.. And I thought if those two organizations were on the same page on something, it would be worth investing in. But they have— they create something called the HIG Index that allows us to actually measure products to look at, like, is a cotton product more sustainable than a polyester product? If it's produced here, if it's produced there, how do you actually compare those things? So the HIG Index is a tool for us as a brand to look at products and compare sustainability. So there's some really amazing kind of tools that we have kind of today around that. We've also committed to science-based targets around carbon reduction, and so that really as a company kind of commits us to lowering global temperature by 2 degrees in like 30 years. And so we're now part of an organization that comes and helps you understand like what is your carbon footprint as a company, how do you make actually these kind of reductions in your carbon footprint so that you can make these science-based reductions in carbon. So that's, you know, we think it is the right thing for our business. We think that it's going to be the right thing for our customers and more important, maybe for your customers. But at the end of the day, I think it's important just for me as a father and as a person and wanting to do kind of the right things in the world. And so, you know, we know that the apparel industry has been a leading polluting industry, you know, historically. We know that there's been a lot of bad things that it has done as an industry, and we're committed to changing that. And it takes a lot of energy and investment behind it, but that's something that we are focused a lot on.

And because it's such an important topic, I'm going to ask all of you to comment on it.

So CJ, we don't have enough volume on the raw material side of things to support that as they do. We have reduced our carbon footprint. Our buildings don't allow us. We have 8 buildings all around a 2-mile radius, and we just don't have the ability to put solar panels on those, so we've paid money accordingly to reduce our carbon footprint. We were 18 months down a journey on recycled appliances that they were taking, like washing machines, refrigerators, etc., converting them into bags, and we had, unfortunately, a wire fraud issue with the vendor that we were using to the tune of 7 figures. So yeah, that's— that cat hasn't been let out of the bag by it. But we had to unfortunately stop that journey. And we had a lot of interest from some major end users and distributors. So we were going down that road and unfortunately had to stop there. But super important to us. We have a chief sustainability officer we just hired 2 months ago.

And we're kind of following in SanMar's and many apparel divisions' footprints Like CJ's, ours certainly isn't as well developed as what SAMHSA is doing, but what we've also wanted to be careful of is that it didn't come across as greenwashing, that whatever we did was a legitimate step in the right direction, small or big as it might be. And so our first step, and this is something again that no matter what your business is, you can do these things, you can conduct your own audit. There are companies, and I'm happy to share the names of those that we've worked that can audit your facilities, but importantly can go upstream and audit the facilities of those that you work with. So that was our first point of entry in terms of social responsibility and importantly product responsibility. We've continued to look for opportunities to remove, and not just the ingredients that say larger distributors or the government will say we shouldn't include, but even those that are potentially irresponsible. From a sustainability standpoint. So we've audited every product in our catalog to make sure that we're doing the right thing in terms of ingredients. And beyond that, offer products that are truly recycled in nature and not just simply, you know, like the wheat straw phenomenon of 3 years ago, that here's a wheat straw adult diaper that's now being made. It officially jumped the shark, I think, in early 2020. And instead, it's more a matter of, no, where can we truly prove the provenance of these ingredients lay them bare on our website, and stand behind them. So it's been a multi-faceted effort. Again, nothing as profound as the largest solar installation on a continent, but at the same time, something that in terms of an end user that they can wrap their arms around.

That—

and Batch and Bodega is an example of that. We're sourcing locally wherever possible such that we're going to reduce our carbon footprint. We've also As of this year, it's our third year partnering with UPS, that for every shipment that is shipped on our account, we offset the carbon footprint. And that's been a real winner for both supplier HPG and distributor, that it gives a very good message for that end user that this is a responsibly shipped product and we're doing our part in terms of ensuring that we're part of that solution rather than the problem.

Chris and I got that, we did the same, we got the idea from an event that we both attended, Jeremy as well, and I think this is something that each and every one of you can easily do, and the more the better, and it doesn't cost you a whole lot at the end of the day, it's a very, very small percentage.

Okay, we're going to get out the crystal ball now. I want each of you to make a prediction on two things. One, when are things going to ease a bit? When are lives going to get a bit easier on the supply chain front? And secondly, when do you think things will go back to equilibrium? Jeremy, first one, when will things ease a bit?

So I think it's going to be, at least at SanMar, a really— it's going to be a challenging next couple of months. The fourth quarter of this year is going to be challenging. It's our biggest sales quarter. We will continue to struggle with labor and our distribution centers. Our carriers will struggle to deliver, especially around like Cyber Monday. I highly encourage you to avoid shipping as much as you can around Cyber Monday. It is going to be a challenging time. Our business drops significantly into the first quarter. Our sales volume drops. We think with what we have kind of on order and how our business will trend, that as we get into Q1, that we're going to really start to be able to start to build inventory. I think that assuming that you don't see COVID get significantly worse in producing countries, that as we get into the second half of next year, that you're going to really see inventories rebuild. And I think by the end, really the second half, fourth quarter of next year, you're going to see us in a really good place. But it's going to take really until then. So we're 9 to 12 months from today until I'm going to feel really good about kind of where we are. And that's assuming that we're in a place from a COVID perspective that works. You know, I talked about Honduras and how Chiloma is like so uniquely positioned in the t-shirt world. You know, we've been able to vaccinate pretty much everybody now at our factory. They have the AstraZeneca vaccine, but you know, as we all know with different variants or whatever, if you see huge spikes, that's going to affect us all dramatically. So we hold our breath and we hope and cross our fingers, but that's my best prediction right now.

So you're saying Q1 for a ray of hope and Q4 2022 to have things a bit more of an equilibrium?

Yeah, I think you'll see an ascending year next year. Things will continue to get better all year long.

CJ, agree or disagree? I'm in accordance with him on the actual inventory itself. I'm not so happy about or optimistic about what's going to go on with the shipping containers and such. And that's, for us, that's a big driver of the cost increases. That's It's a three-horseman, but the first horseman is the container rates, and it's heavy. I have a really close friend that's in the automotive industry. He has about 18 dealerships now, and they bring most of their stuff into the Savannah port. And according to their contacts at the Savannah port, we're talking 2023 Q2. So we start to level out. I trust the automotive industry pretty much over anybody given the bailouts back in the day and how important they were to our economy and such. So get ready for that, and prices are gonna either stay the same or start increasing accordingly. And the heavier stuff, the folding chairs and the rolling cooler bags, will be impacted more.

It's the reality of the situation. Chris? I'm reminded of that sign at the bar here, the free beer tomorrow. I think that's what we're going to see in terms of when things are better.

It's tomorrow.

And we'll see if tomorrow comes. Our head of supply chain, Jean Wong, she is a pragmatist. And when I talk to her about these topics, because we're trying to break out our own crystal balls in terms of inventory, in terms of pricing, you know, is this here to stay? Is this something that we can potentially offset for a few months and wait for some relief? And the bottom line is the answer is yes, it's here to stay, and no, you can't continue to absorb it. And what we're expecting is that in terms of the acute increases, the signs that we're interpreting are showing us again mid or so next year on the freight side. I'm hopeful that we're, we're quicker than the automotive industry's prognosticators, but that's what our best sources are telling us. From the other components or the other legs on this stool, Labor is not going down anytime soon. Wages are generally sticky downward. One of the first lessons we learned in labor economics. And as far as raw materials go, there have been so many shocks to the system, it would be foolish of all of us to assume that it's going to be steady state from here on out. It's going to be raw material whack-a-mole for the foreseeable future because global volatility is not going away. So what I anticipate is that we're going to see perhaps an easing in terms of the upward pressure midway through 2022, but that's not to say there are going to be any price reductions anytime soon.

So we're going to shift gears for my last set of questions here. We're going to get personal. You guys didn't know this was coming. So each of you has been under an extraordinary amount of stress. Over the past 18 months, to say the least. Hair loss, beards going gray.

What have each of you done kind of personally to cope with managing that stress? I also have young children to deal with through this, so that's not— that's been an added deal. I went to Michigan for 2 months after, kind of right after the 4th, this summer, and just took a digestion from basically 16 hours at our factory every single day unpacking boxes, doing whatever we had to do to make things happen and and to put you guys in a good position. And it was great. I came back to hell again, but for those 2 months, it was a really nice break from insanity. The 3 of us and all the other suppliers, and you guys are going through the roughest business climate that we've all been a part of, and we can commiserate together, but you do need those, you need those times of just, hey, we're doing the best we can. There's always a little bit better you can do, but chill and get some mental capacity back. I was in a really, really, really bad mental place for a while there. Honestly, it was, uh, well, we almost sold our business, quite frankly. It was, uh, it was that ugly. And, um, that break really helped. That's all I can say. And, uh, we're going through a lot of stuff. So I ask your team, and you can yell and scream and curse at me. I could care less. That's great. I take it all day long. But be nice to the people that are working for us. The word grace comes to mind, and the single mom that has 2 kids and one has COVID and they can't get them to school for the day, those are the people that are fielding the phone calls and getting screamed at because they, they can really control what the container is doing. They can't control that, right? And we're doing the best we can to update everyone. So just a little bit of grace to those people. If you're not doing that, your team's not enforcing that, please.

Hey man, like CJ, when COVID first hit, it was like, you know, our business was a disaster, but like our team was like in this bunker together and like fighting through every day. Like, what are we going to do? And we got to the end of 2020 and I was like, thank God this year's over. Like, you know, now it's like we all look forward. Like, it's going to be like, turn the page on this, just suck, we'll move on. And this has been— 2021 has been so much harder. I think just the level of kind of exhaustion and the whack-a-mole challenges of every day dealing with all the issues around COVID and vaccinations and masks and people on every side of it. And so I have 6 kids. I wake up early, I work out from like 5 to 6, and it's like the only time of the day that like I'm the only one up in my house. And that's probably the thing that's like saved me. But if I could reiterate exactly what CJ said exceptionally well, like I, the thing that's hardest for me is that our frontline people are taking the brunt of our challenges, and that's exceptionally hard for me. And, you know, I usually have to fire a customer once every about 3 years, somebody who's just like not nice, and then I give them Dan's phone number and say, you know, tell them to call Dan. And I talked to one last week who threatened to kill me because the carrier had lost his packages in like I did not give him Dan's cell phone. And like, I, you know, so it's just, but it's like a constant, you know, right now. So I would plead for the same grace that CJ did.

In my case, I had somewhat of a mixed bag of blessings, if you will. And the weekend before the world shut down for COVID, I was at Disneyland and I was there for a very specific reason. We have a little niece who was suffering from a very aggressive form of cancer. And we were there with her. She wanted to get together. Our daughters, or my daughter and she, are the same age. So, we're at Disneyland. I'm literally living my best life. Churro in this hand, turkey leg in this one, just hitting it hard. I was in all my glory. And I started getting text messages just that, "How are the lines?" I'm like, "Oh, they're I'm winning at life. And we not only are here and we get kind of special access, but there's nobody at Disneyland. And that was kind of like sign number one that stuff was getting real. And then more messages started coming through from across our facilities, just that, hey, should we come to work this week? We're questioning if we should even open up shop. And so I didn't go home that day. I went straight to Boston. And on the way there, I emailed our CFO and said, "We need to start stress testing this thing. Here's what a 10% reduction looks like, a 20%." Little I know that was wishful thinking. But the bottom line is that in the moment, that felt like this unforeseeable parade of horribles. Just that— well, I remember walking through Boston Logan Airport that third week of March to go back with my family on the weekend and literally I saw somebody in a hazmat suit and I thought, The end is here. And just one of the most surreal sights I'd ever seen, that literally an airport that's bustling, there's nobody in there except for Ned over there in a hazmat suit. And I'm wondering, you know, am I going to die immediately or do I have a couple minutes? So I get home, start talking to my wife and literally like watched our order count. You know, HubPen on a good day is receiving thousands of orders and it dried up to literally nothing overnight. So this machine that, that was equipped to convert plastic, metal, and ink into money is no longer doing that. And it was a real eye-opener. Yet I get home and almost immediately receive news about this niece, and it all of a sudden put things in perspective. So the last year and a half, they have been a prey to horribles, and airplanes falling out of the sky. All the while, I watched this sweet little girl battle cancer, and we stopped whenever we could and literally took every moment we had to spend with her. Because it was the kind of thing where if we had a family party, our daughter would be wearing the same dress as she would, and they would coordinate. And, uh, she passed away about a month ago. And when I say a mixed blessing, She was a great reminder to not lose perspective, that here she was suffering from something that was so horrible that it really made me realize how silly I was being when I was that wrapped up about whether or not we could ship out of this facility. We had at that point 9 locations, 8 of which were under shelter-in-place, so we, we effectively had to shut down. The majority of our operation. And here I thought, you know, the universe is conspiring against me. No, it really isn't. And it was a humbling, life-affirming, and if nothing else, centering experience. And her name is Navy, by the way, and she was a great example. And the timing was unbelievable because she taught that same lesson to many people who otherwise could have been a little bit more adrift during COVID It is all about perspective.

Thanks so much for tuning in to this episode of SkuCast. Be sure to keep up with our latest content by subscribing to SkuCast on iTunes or to our blog at community.skucast.com.

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Until next time, friends, thanks so much for listening.