To say that retail supply chains are disrupted would be putting it mildly. Since the Covid-19 pandemic, fluctuations in demand and disruptions in logistics and production have hit all industries. Nevertheless, McKinsey lists five tips for how retailers can shock-proof their supply chains.
Up to 40 per cent less profit
When the Covid pandemic broke out, it seemed, initially, that consumption would be on hold: factories had to close, transport ground to a halt, and stores had to shut their doors. Brands cancelled their orders, and retailers tried to minimise their stocks. However, one could not anticipate the surge in e-commerce and the new urge to buy from home: in the past year and a half, the share of household spending on goods in the United States has risen for the first time in sixty years.
Retailers and brands are pulling out all the stops to deliver goods to consumers as quickly as possible, but that adds to the chaos. With the whole world interconnected, the consequences of any disruption instantly take on unprecedented proportions. The ripple effect has perhaps never been so apparent: transport costs are soaring, ships are stuck in ports, and labour shortages are on the rise… and all the while, the all-important holiday season is fast approaching.
McKinsey fears a drop in profits of up to 40 per cent in the retail industry if the shocks in the logistics chain are not absorbed. In the long term, too, 15 to 20 per cent of profits are at risk of disappearing due to logistical difficulties. A new approach is required: first, with radical short-term interventions, but after that, also by developing permanent new strategies.
1. Delegate from a control tower
Who has an overview of the supply chain? Too often, different teams manage multiple, disconnected data systems, resulting in late identification of a problem and failure to seek integrated solutions. Instead, McKinsey recommends establishing a single, centralised control tower. This control tower should connect data systems and generate insights across the entire chain. It is worth the investment, as greater transparency improves fill rates by an average of 10 per cent while reducing excess stock by 30 per cent.
The control tower can also help allocate stock. Many retailers have had to make difficult choices on allocating their stock to best meet customer demand during the pandemic’s peak while protecting their sales. These are the kinds of decisions they will have to keep making. Ideally, promotions should be aligned to available and expected stock levels; knowing which regions or stores are high priority is crucial when deliveries are scarce.
2. Treat suppliers differently
Who would you prioritise in times of scarcity: a regular customer of many years or someone who opportunistically pops in? The same goes for suppliers. Try investing in longer-term supplier contracts (18 to 36 months), especially for ocean freight and leases on – increasingly expensive – warehouse space.
However, this does not mean that retailers should put all their eggs in one basket. On the contrary, they should resist the temptation to rely too much on one supplier to get volume discounts. It is better to distribute it among them to increase capacity quickly if demand fluctuates or if a supplier faces capacity constraints and it needs to be absorbed. McKinsey is not only thinking of product suppliers but also logistics providers or even courier services.
3. Efficiency is only just becoming important
The current shortages mean that every link in the supply chain must be used to the best possible advantage. Making the most of the capacity you have is more important than ever – even in logistics. While transport planners may have previously favoured rush orders or other higher-margin transport, they are now forced to prioritise efficiency.
The same is true for warehouses: as labour costs rise, so does the value of productivity improvements (such as warehouse redesign, revising labour standards and investing in lean operations). By emphasising this, retailers can better protect themselves against shortages, including those in the labour market.
4. Map out your network
Why produce in the Far East if you can do it closer to home? Isn’t it better to deliver online orders from the stores rather than distribution centres? These are questions that retailers need to address fundamentally. Recent disruptions have exposed the vulnerabilities of international retail: the current network no longer meets the demands of the increasingly volatile future. The entire supplier mix, locations, geographical regions and existing assets – from stores to distribution centres – need to be re-evaluated.
Likewise, decisions have to be made in terms of procurement planning. How can retailers better coordinate their purchases, optimise the assortment, and minimise disruptions to deliveries? Simple is better, McKinsey recommends. The earlier retailers submit orders, the greater the chance that those orders will be accepted. Similarly, reducing SKU complexity can reduce the risk of stockouts. Furthermore, by distributing inventory across an integrated network, retailers can move goods closer to their final destination, reducing costs and increasing the chances of delivering the promised service.
5. Invest in automation
There is more to automation than simply saving on labour costs. At a time when absenteeism and employee turnover are high, automation is a way to increase service levels and reduce the risk of lost sales through stockouts. A McKinsey survey of supply chain executives found that 64 per cent of respondents now consider automating warehouse functions a top priority.
As supply chain disruptions continue, volatility and uncertainty will persist throughout the foreseeable future. According to McKinsey, no single intervention will have an immediate and all-encompassing impact, yet retailers who have the courage to transform their supply chains can achieve significant returns. And just as importantly, these efforts create long-term resilience. It is time to prepare for the New Normal.
