As the coronavirus (Covid-19) outbreak has spread and its humanitarian impact has grown, challenges have arisen in the global supply chain. As a result, retailers are taking actions to resolve the immediate challenges the pandemic presents to supply-chain workers, business partners, and operations.
The Covid-19 outbreak has had far-reaching effects across the supply chain due to stepped-up health restrictions and big shifts in consumer purchasing behaviour. Sales of non-discretionary products, such as food, household, and personal-care products, have spiked, while sales of discretionary items, such as apparel and furnishings, have tailed off.
A new report by McKinsey & Co – ‘Five actions retail supply chains can take to navigate the coronavirus pandemic‘ – shows how retailers are taking extraordinary measures to keep goods moving, and how supply-chain leaders are creating transparency and building rapid-response capabilities to mitigate the short-term fallout from the crisis. In some cases, apparel retailers are mobilising production facilities and supply chains to help address the global shortage of personal protective equipment (PPE).
“Stores, logistics systems, distribution facilities, and supplier networks weren’t engineered for the rapid shifts in demand patterns we are seeing today,” McKinsey explains.
“The pandemic has forced retail executives to mount urgent efforts to adapt their supply chains, whether by revising their purchase orders and merchandising plans or by reallocating all kinds of resources—working capital, inventory, employees, transport capacity—to where they are needed most.”
Below are five actions retail supply chains can take to navigate the coronavirus pandemic :
Suppliers: Secure demand
- For the most important product categories, category captains are holding daily meetings with strategic suppliers to work through the options for securing an adequate supply of essential high-demand items.
- Some retailers are counselling their suppliers to improve their management of inventory (including commodity products), advising suppliers not to buy raw materials, so they can avoid deepening their cash deficits. Retailers can also raise cash by working with their distribution partners to sell off excess inventory.
- As a last resort, retailers might explore delaying or cancelling orders—an approach that poses some risk to their supplier bases. Multiple suppliers in Asia are shutting down operations as purchase orders are being cancelled or pushed out. A leading apparel retailer based in North America, for example, is working closely with its vendor base to review 40% of its buys for the upcoming fall season while simultaneously pruning its assortment for spring 2021. These are not easy choices to make for either party and would require collaboration among retailers and vendors to benefit both sides.
Merchandising operations: Redirect inventory
- As retailers recalibrate their product orders to line up with consumer demand, they will need to cascade the changes across purchasing, planning, and inventory-management operations.
- To move inventory around quickly, retailers might have to bypass or override their inventory-replenishment and inventory-allocation algorithms. For example, one of North America’s leading retailers is actively deploying inventory across the network to regions with the biggest product-availability deficits. In some instances, retailers will also need to reassign their merchandising-operations staffs to have enough coverage of key categories and products—a step that can require rapid onboarding and cross-training.
- Some merchandising moves for discretionary categories resemble those for essential-goods categories. To conserve cash, retailers can sell more merchandise they already own by reallocating inventory among geographies. They can also dial down purchasing plans for the near term.
- One fashion retailer’s response to the outbreak reflects all these moves. The company is selectively reallocating its financial and human resources to support e-commerce operations while changing its inventory spending to adjust to the shift to online purchases, driven primarily by store closures. The retailer is also adjusting its longer-term purchases, in the expectation that the pandemic will accelerate the adoption of e-commerce.
Distribution: Add capacity—safely
- Distribution is the supply-chain segment where demand trends for non-discretionary and discretionary goods begin to overlap significantly. We’ve seen some companies reassign current employees to have more capacity in non-discretionary categories where goods are selling fastest. (In the case of discretionary-goods retailers, some are choosing to cross-train and reassign back-office and store personnel to support e-commerce operations.)
- Some retailers have temporarily moved their office workers into distribution centres to perform jobs like operating forklifts, in addition to hiring associates from discretionary-goods sectors, where demand has tapered off.
- Keeping distribution-centre workers healthy during the pandemic requires taking added and necessary precautions.
- Maintaining good workplace hygiene is also important. Between shifts, retailers can suspend operations at their distribution centres so that cleaning crews can sanitise equipment. And all staff, whether long-term or temporary hires, should undergo training in proper health procedures and be given the right protective equipment.
Logistics: Balance agility and flexibility
- The surge in demand across nondiscretionary product categories is slowly eating away at excess capacity. In the US, trucking demand increased by 150%, year over year, in March. Freight costs have also spiked, with double-digit percentage increases in spot rates from February to March.
- The best that retailers can hope for in this tightened environment is to secure enough capacity to get essential items on store shelves reliably and swiftly. One strategy retailers are adopting is to have suppliers bypass distribution centres and ship goods directly to stores. They are also simplifying assortments and packaging, so that suppliers can make same-SKU full-pallet shipments to hub stores or distributor-consolidation facilities. This approach puts shipping speed ahead of product variety at a time when many consumers would rather have adequate supplies of key items than a wide assortment.
- Some retailers of nondiscretionary goods are supplementing their transportation capacity by partnering with discretionary-goods retailers, whose private or dedicated fleets are likely to be underutilised because of lower sales volumes. There are several examples of cooperation across industries to get products on shelves, especially in high-density urban areas.
Fulfillment: Deliver reliably
- We’re seeing retailers of nondiscretionary goods make [delivery] changes more successfully by adhering to several practices. One is widening delivery windows from immediate or same-day to two or three days. This allows retailers to rationalise the scheduling and routing of deliveries, so that deliveries in the same area can be grouped together and sent out in one round of drop-offs by the same driver, saving time and mileage. This approach also gives retailers more flexibility, so they can sync order deliveries with the arrival of inventory shipments.
- Another practice compensates for the decline in-store traffic. By converting some outlets to “dark stores,” where workers pick orders, retailers can make good use of their stores’ on-shelf inventories and proximity to consumers. One fashion retailer lowered the order size necessary to qualify for free shipments and relaxed return windows to give customers more flexibility.
Click here to view the full report.