Strain on Supply Chains
As the pandemic took hold on the global economy, manufacturers slowed production due to factory shutdowns and an anticipated decline in demand. However, consumer recovery was faster than many expected. The vaccination roll out, decline in COVID-19 cases and the accumulation of strong personal savings encouraged consumers to go out or online and spend; however, supply chains hit snags. Cargo ships remain backed up at ports, shipping containers are hard to come by and fuel costs are on the rise. Factories in China and Vietnam continue to face closures amid virus outbreaks. Meanwhile, a shortage of truckers and distribution center staff mean added delays once products are shore-side.
In 2022, ongoing manufacturing and supply chain issues will persist for retailers trying to fulfill their inventory demands. BDO’s 2022 Retail CFO Outlook Survey polled 100 retail CFOs to find out how they are grappling with the crisis.
SUPPLY CHAIN DISRUPTION IS CITED AS THE #1 RISK TO BUSINESS
Retailers are impacted by supply chain threats ranging from rising transportation costs and delays to elevated customer expectations. All of these factors translate to rising prices and product shortages. In response, retailers are largely passing on these costs to consumers.
55% of retailers will raise prices in 2022
38% already have
Consumers may have been willing to tolerate higher prices during the holiday season, but they will likely ease up on spending as savings wane and prices continue to rise. Retailers should expect customer resistance to higher prices and identify alternative strategies to absorb costs.
Labor Challenges Compound Supply Chain Crisis
To manage intense supply chain risks, retailers are prioritizing what they can control.
Improving forecasting accuracy and inventory management requires retailers to invest in critical supply chain technologies — including predictive analytics capabilities — but also staff with the skills to wield them. At the same time, bolstering delivery service to stores and directly to customers means hiring more drivers amid a trucker shortage.
The reality is that labor concerns leave retailers at risk for damaging customer relationships. Understaffed distribution centers lead to delays on customer orders while understaffed stores lead to long lines and disorganized aisles and product displays. A labor shortage could also impact sales if stores are unable to stay open normal hours. Each stage of the supply chain would benefit from an improved talent attraction and retention strategy.
Evolution of Supply Chain Strategies
From just-in-case manufacturing to just-in-time, supply chains have undergone significant evolution and are once again on the precipice of sweeping change. The pandemic has proven that yesterday’s supply chain model isn’t sustainable. Retail stands to benefit from the current shift to an “ahead-of-time” approach.
Industrial Revolution - 1990s
Just-in-case
Traditional approach to manufacturing in which retailers ordered extra inventory to be prepared for an unexpected surge in demand.
Advantages- Prepared for shortages and provided resilience during supply chain crises
- Prone to waste and future markdowns that potentially damage the brand
- Higher costs due to large inventories and more requirements for warehouse space
- Risk of aging inventories restraining cashflow and new purchases
1980s - 2021
Just-in-time
Pioneered by Toyota in the 1950s, inventory is ordered based on customer demand, and on shorter timelines. Smaller inventories lead to savings on warehouse space and labor costs as well as less excess.
Advantages- Eliminates waste and avoids future markdowns that potentially damage the brand
- Lower costs due to smaller inventories and less warehouse space
- Can more easily pivot product assortment based on customer demand Disadvantages
- Vulnerable to shortages if demand is not properly forecasted
- Can be heavily impacted by supply chain crises
2022 - Future
Hybrid / Ahead-of-time
Having experienced pandemic-driven supply chain disruption, retailers are reevaluating their supply chain approach. Many are looking to how they can be prepared for the next disruption and are pursuing a hybrid of Just-in Time and Just-in-Case.
But the future will reveal what the next iteration of supply chain management will be.
A new supply chain management approach, which for the purposes of this report we’re calling Ahead-of-Time manufacturing, will be fueled by advancements in AI and machine learning. Predictive demand forecasting models will inform more accurate purchasing. Ahead-of-Time manufacturing will use a diversity of geographic suppliers, including those close to key markets.
Advantages- Predicts customer demand into the future instead of responding to current or near-future demand
- Sources from geographically diverse suppliers for insurance in the event of global supply chain disruption
- All the advantages of Just-in-Time, with fewer risks of shortages Disadvantages
- Requires upfront investment into a digital supply chain, logistics management and forecasting technology
Smaller Retailers Apt to Stick State-Side for Sourcing
#1 Tactic to address supply chain disruption: Identifying alternative / backup supplies
Globalization has been a defining economic and political force of the past few decades, with many retailers relying on products from factories overseas. But this year, almost half (46%) of retail CFOs say they plan to source the majority of their products from the United States in 2022, with smaller retailers most likely to say so.
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Supply chain bottlenecks are an inevitability for the foreseeable future. Retailers that haven’t already made moves to de-risk their supply chain will be starting this year on the back foot. Even retailers that have diversified their supply base are subject to rising costs and capacity constraints. These issues may be symptoms of the pandemic, but they are indicators of systemic weaknesses in global supply chains that aren’t going away. Retailers need to discard conventional notions of supply chain principles and leverage advancements in predictive technology to respond to the realities of the day. TED VAUGHAN |
It remains to be seen whether these bold plans for reshoring come to fruition. A source change can take years. If these retailers are serious about sourcing most products from the U.S. in 2022, this process should already be in motion. Additionally, while sourcing products from the U.S. means better control over delivery timelines, labor costs and taxes are a critical consideration.
Beyond moving to the U.S., retailers are looking to rebalance their supplier makeup. Approximately half (49%) of retail CFOs say they will identify alternative or backup suppliers in 2022 — a strategy that may be easier said than done. Long-standing relationships with suppliers often come with favorable rates and starting fresh may mean paying higher prices upfront. Retailers that expect to place large orders have the leverage to force current suppliers to prioritize their order or negotiate rates. They may also be able to arrange contracts more easily with alternate manufacturers.
BDO Insight
The specter of supply chain dysfunction continues to loom over the retail sector. Larger retailers have gone as far as to charter their own ships to dock into smaller ports with fewer delays — a cost-prohibitive option for most retailers. The vast majority of retailers will require a more holistic revamp of their supply chain to mitigate today’s crisis and navigate future disruption. Simply getting products into the country is a major hurdle, but supply chains are plagued more broadly, from factory to doorstep. While some shipping delays may be unavoidable, there are actions retailers can take to bring high value products to customers at the speed they demand.
Staff plays the role of intermediary between products arriving at port and being transported to stores and customers. Retailers should consider reimagining the employee experience to combat the effects of the trend of people leaving their jobs during pandemic recovery. Employers need to design and frame roles in a way that inspires store associates and distribution center employees to think of their positions as careers, not just jobs. Retailers can appeal to employees by providing skills training and opportunities to work with new technology. Providing the right pay, benefits, and training is the price of entry to attract committed, long term workers. Additionally, high degree and experience requirements may be acting as a barrier to entry for some qualified workers. Lowering those barriers, within reason, will be key to finding more qualified candidates.
With a deluge of e-commerce and online ordering, traditional logistics and shipping companies are struggling to handle package volume. With that, we may begin to see more retailers turn to owning their supply chain from end-to-end, including owning their delivery fleets, which we’ve seen larger retailers begin to pursue. As logistics and distribution issues strain the e-commerce model, retailers can focus on getting customers in store to boost sales. Once in store, customers are more likely to make a purchase, even if it’s for their second or third choice product. For their first-choice product, customers may be more willing to accept delays, so these high-value, high-demand products may be better suited for e-commerce channels.
Learn More
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Methodology
BDO’s 2022 Retail CFO Outlook Survey polled 100 retail industry CFOs with revenues ranging from $250 million to $3 billion in October 2021. The survey was conducted by Rabin Research Company, an independent marketing research firm, using Op4G’s panel of executives.
