RETAIL SUPPLY CHAINS

BY GARY NEWBURY

STRENGTHENING RETAIL SUPPLY CHAINS

HOW TO BUILD SCALABLE SUPPLY NETWORK DESIGNS

Gary Newbury is interim chief supply chain officer – retail supply chains & last mile at Retail Aid.

The pandemic has undoubtedly been torturous for retail supply chain executives working with geographically extended supply chains. This is especially true when those supply chains move general merchandise items through just-in-time supply networks to fulfill what were once predictable demand patterns.

Before the pandemic, organizations set up retail supply chains to achieve “lowest individual element cost.” This was supported by investors who enjoyed a dividend stream from this arrangement. Many governments also benefitted, as they were keen to demonstrate a continuous rising standard of living for citizens.

Demand patterns were stable, linear and competitive. Competitiveness arose not through differentiation. Rather, it came from having the “lowest price,” or what has been described as “the race to the bottom.” Many teams never learned to execute proposition differentiation. If they did, it was not obvious, and they failed to reinvent their brands as they encountered long-range declining markets and profitability.

Here in Canada, there was also a tightening of household budgets during the two years preceding the pandemic, so much so that in March 2020, 48 per cent of working Canadians were only $200 away from meeting their financial obligations. At 1.70, the debtto-income ratio was the highest of any developed nation.

The development of supply chains with a focus on single factories to drive economies of scale during procurement – and low-cost, advanced global transportation systems – meant Canadians could expect to have a wide selection of products presented to them, all at relatively low prices.

The complacency that came from the predictability of category spending and seasonality provided little resilience to the demand pattern changes unleashed during the early stages of the pandemic. These changes accelerated quickly.

As governments put through emergency legislation, consumers switched their category spending, their channels and their volumes. Many retailers were caught flatfooted, and many filed for CCAA. Some participated in significant layoffs to conserve operating cash.

THE FIRST TWO YEARS

Many retailers and their CPG partners doubled down on the processes that got them to early 2020. They stepped up pressure on an ecosystem that had been based on linearity, fixed capacity due to the focus on cost reduction, low transparency, a lack of sustainability and inadequate risk management.

In Canada, during the first few months, within the food supply chain the “Big Five Grocers” and key food CPGs worked together to reduce SKU count. They focused production on the “vital few” to assuage potential consumer anxiety from empty shelves of key lines and staples. It was important to avoid triggering panic buying as no one would win from this.

However, this spirit of goodwill reverted to the usual level of combative behaviour within weeks. Fines for less-than-full order fulfillment and out-of-time window deliveries recommenced and it was “business as usual” in the face of continuing swings in demand volumes and tough government restrictions.

The swings in retail supply chains came from more consumers buying online and deferring spending on hospitality, travel and apparel in preference for home and household category products.

Initially, supply pipelines were drained to support unexpected demand. However, the demand kept increasing, often supported by government subsidies. There was also asynchronous capacity waxing and waning at factories, ports, ships, drayage, rail heads and within trucking fleets. This was due to COVID outbreaks, and major bottlenecks appeared as product and logistics operations expanded and contracted. Add in some unusual weather events, infrastructure challenges and peak, and the current designs showed little natural resiliency to such accumulating disruption.

In early 2022, with forecasts this disruption is likely to continue into 2023 and 2024, supply chain executives are compelled to rethink the current supply chain designs, processes, systems, infrastructure, culture and KPIs.

CONSTRUCTING A ROADMAP

Early in the pandemic, one could not attend a webinar, read an article or have a business conversation without three prevalent descriptors: agility, resiliency and pivoting. Beyond the headlines, supply chain leaders and their teams were severely stretched to produce miracles, based on the short-term goal of “getting back to normal soon.” A “just do it” mentality pervaded.

Unfortunately, two years in, there has been no respite; the disruption continues to accelerate. Smarter organizations are looking for options to move to a more flexible supply chain design.

As a speaker on retail supply chain disruption and creating real competitive agility within supply networks, I continue to be surprised with

“The swings in retail supply chains came from more consumers buying online and deferring spending on hospitality, travel and apparel.”

“pin drop” moments I create when I pencil options for being more agile, more resilient and able to pivot. I sum this up in the phrase “Scalable Supply Network Designs” (SSND). These steps deserve consideration to establish an SSND fit for the challenges of the 2020s:

1) Recognize that the current supply chain design is no longer fit for purpose. Being highly dependent on many nodes and connectors, it is likely to have too many lead-time risks. This does not allow retailing businesses to respond quickly and efficiently to demand signals – key in creating market-leading trends.

2) Develop a multi-region sourcing strategy including, where possible, onshoring, nearshoring and far-shoring. Pay particular attention to geopolitical challenges and single sources of raw materials. For example, certain materials may only be available in specific regions.

3) Ensure that the executive team agrees with the new scalable supply network design.

4) Engage with multiple suppliers at country level. Ensure robust and enforceable NDAs are a precursor to new ways of working, including experimentation, full two-way visibility and collective responsibility in pursuit of serving the consumer accurately and efficiently.

5) Agree to “price indifferent” trading agreements. Here, the capacity can be described in terms of batch sizes to which the same price points prevail. The choice of supplier for a section of projected demand is based on speed to fulfill, rather than being in a queue behind other competitors pursuant to “lowest-cost” tactics.

6) Establish collaborative working arrangements that include meetings across the SSND. These meetings can focus on sharing capacity plans and demand information and planning to satisfy projected demand in the shortest time, including transportation mode switches.

7) Commit to orders – both ways. As the customer, your orders should be seen as solid, only cancelled before raw materials have been ordered, rather than when they are in production. This commitment applies across the supply network. Traditional competitors will work together to ensure, collectively, progress is maintained.

8) Work closely with individual suppliers to remove friction from the path to purchase and fulfillment.

9) Deploy integrated business planning across the SSND to ensure alignment between supply network capacities and distribution network demands.

10) Digitize the SSND and manage exceptions, rather than engaging in firefighting or expediting.

Each of these steps has intricacies, requires relationship-building skills and trust. However, for businesses stopping at the second step (diversifying the geography of suppliers), business leaders must encourage their supply chain team to embark on this journey and push towards the tenth step.

Stopping at the second step and exercising the same paradigm in terms of managing suppliers, costs and lead times will not provide competitive advantage in a retailing world in which “inventory is king.” SP