No business has escaped the supply chain squeezes of the last few years, but the impact is particularly immediate for retailers, who often rely on the ‘just in time’ (JIT) model to get goods on the shelves. So how are they coping?
The supply chain disruption has taken a huge toll for many companies. It’s not a single issue, notes Emile Naus, formerly head of logistics strategy at Marks & Spencer and now a partner at management and tech consultancy BearingPoint. Instead, it’s “the cumulative effect of Covid resulting in temporary labour shortages as well as long-term labour migration, transport issues due to disrupted flows and loss of capacity, war in Ukraine and the overall disruption to sales, demand changes and cost inflation”.
There have been temporary but high-profile shortages of staples such as loo roll, pasta and anti-bacterial wipes, largely as a result of panic-buying in March 2020. Even so, brands and retailers have largely managed to keep shelves well stocked. How have they managed it?
Price rises and admin headaches
It hasn’t been easy. Take Silent Pool, which sells its artisan gins in some 45 countries and just won the Queen’s Award for Enterprise for International Trade. According to founder and managing director Ian McCulloch, events such as Brexit have meant an increase in paperwork, while cash has been tied up in raw materials from the EU as the company has to hold greater stocks. There has also been a massive increase in shipping costs, he says, “driven in part by the government using containers as temporary storage at ports.”
The business has seen delays of up to three weeks on some longer shipping routes, with container prices up more than 1,000%, McCulloch says. In response, they send larger loads less frequently, which has impacted cashflow. “We are currently absorbing price rises in raw materials and transport but at some point will need to pass them on.”
No retailer is immune from these types of challenges, even the likes of supermarket giant Tesco. “It is fair to say that our supply chain has been tested this past year,” says its CEO Ken Murphy. “But thanks to good planning and great collaboration from our suppliers, we kept products moving and protected availability.”
In fact, Murphy has credited the resilience of Tesco’s supply chain in helping it outperform the wider market in the last year, thanks to longstanding supplier relationships and leveraging new supply routes, such as rail. The group now has a dedicated train service bringing produce to its distribution network from Spain.
Retailers across all sectors have been forced to navigate these challenges. In the short term this may have meant tweaks to product ranges and promotions, with most retailers limiting their range and focusing on higher value, higher-margin products, says Naus.
“This has been quite explicit in some sectors, but the trend is visible across all retailers.”
But in the longer term, procurement officers and their teams are having to take a broader look at how they manage their supply chains. “Retailers are responding by changing their supply chains to ensure they have more resilience built-in,” Naus says. “This means having several supply options, moving some production closer to the end market and changing manufacturing strategies.”
End of the road for just in time?
Some changes to strategy have been sweeping. For example, instead of using a handful of centralised warehouses and fulfilment centres that can ship globally, many retailers are now opting for distributed inventory models, with multiple smaller fulfilment centres, says Enda Breslin, general manager for EMEA at logistics and fulfilment firm ShipBob.
“These distributed inventory models are allowing retailers to cut distances from suppliers and to customers,” he says. “This will also be key for bottom lines as they spend less on warehousing old stock, goods stuck in containers or at sea, expensive shipping methods and delivering products to the end user.”
The JIT model is now “out of the window for many retailers,” he adds. “While it’s an efficient method in a perfect world, its vulnerability in a crisis is clear to see.” Instead, there’s a clear trend of retailers near-shoring suppliers. For example, clothing manufacturers are switching from Chinese suppliers to partners in countries like India or Turkey. “Although these may not be on the doorstep of many, being closer to your suppliers helps mitigate risk.”
Many retailers are also working with a larger pool of suppliers, says Rob Wright, executive director at supply chain and logistics consultants SCALA. Relying on a narrow range of suppliers makes them more susceptible to disruptions in supply chains, he notes, so they’re looking to diversify.
“Supply chain disruption is often specific to geographical area and a diverse logistics network gives retailers more flexibility and agility when it comes to supply chain management and mitigates some of the risks of disruption to certain supply chains,” he adds.
Learning new lessons
Retailers are also looking to address the effects of supply chain disruption by investing in technology, Wright says. For example, alternative fuel technologies such as electric haulage fleets help mitigate the effects of fuel shortages we’re seeing from the war in Ukraine.
“It also helps businesses to hit their carbon emissions targets which is notoriously difficult for businesses that rely on large supply chain networks,” he adds.
These operational changes reflect some invaluable lessons that the last few years have taught supply chain managers and procurement officers, says Naus. Businesses are learning that for the past 30 years, there has been too much focus on prices and cost reduction, ““and the balance of sustainability, flexibility and resilience has been lost,” he says. “In the short term, the focus is on ‘fighting fires’ and ensuring day-to-day product supply. But the long-term fix is to prioritise sustainability, flexibility and resilience.”
This approach means retailers can ensure that no matter the supply chain chaos, their customers are never again faced with empty shelves.