Having the right products available in the right quantity at the right time has always been important. However, the highly unpredictable and volatile period ahead will probably also proof it has never been more challenging.
How is consumer spending going to change in response to a recession? How is the 1,5m-society going to affect consumer needs and shopping behaviour and for how long? What will be the impact of new outbreaks on supply chains? These are just a few of the key questions that have recently made it to the boardroom agenda of retailers.
There is obviously no precedent to base the forecast on. What is clear, is that high levels of uncertainty and demand variability will remain a critical challenge for retail value chains. Most notably, supply chains with long lead times, large batch sizes and/or high seasonal exposure will proof vulnerable. These supply chains rely on early and precise forecasts, which are now virtually impossible to build.
What (not) to do
Unfortunately, some retailers have one-sidedly responded to the recent immediate loss of customer demand by cancelling orders (sometimes already produced), demanding substantial discounts or stretching payment terms.
Although understandable from a retailer’s cash perspective, pushing the problem upstream in the value chain is not a structural solution for the underlying challenge to match supply and demand in this Corona crisis. The current market dynamics require retailers and suppliers to collaborate in partnership and create flexibility and responsiveness on key strategic categories.
Some retailer-supplier combinations are responding in a more sustainable manner.
For example, some food retailers and their suppliers have managed to jointly respond to the recent surge in demand by eliminating side assortment, and thereby significantly increasing the production output of fast moving items.
And, in the fashion industry suppliers and retailers are working together to smartly de-risk the assortment by moving from seasonals towards basics and never-out-of-stock items.
For the more trendy and hence less predictable items, retailers and their suppliers are looking for a Corona-proof balance between product margin and supply chain flexibility, moving towards the latter one. Partial local sourcing, express logistics, smaller production quantities, and delayed order commitments are all discussed jointly.
Where to start
Developing retailer-supplier collaboration to manage such demand & fulfilment challenges is complex and requires trust from both sides. Under normal circumstances building trust can take years, especially if the relationship has been highly transactional and predominantly price-focussed before. But, the current crisis creates the urgency and necessity to act immediately and decisively.
The three measures below are a starting point for retailers to initiate a collaborative response with suppliers to this Corona crisis.
1) Prioritise suppliers and categories based on commercial relevance and risk
The typical retailer has hundreds of suppliers and can simply not engage with every supplier on every category in great detail. Choices must be made.
Segmentation and prioritisation should be based on two perspectives. First, based on commercial relevance: what part of a retailer’s revenue comes from what supplier and what categories are most relevant for its commercial proposition? The second prioritisation perspective is a demand and supply risk consideration: how likely will customer demand deviate significantly from pre-corona levels and how likely will supply chains be disrupted?
A clear prioritisation of those suppliers that require more intensive collaboration emerges once both the commercial relevance and the risk of demand deviations and supply disruptions are understood.
2) Share and use data to understand how demand develops
Most demand scenarios are top-down and expressed in financial terms. In order to be able to make sensible decisions, it is necessary to have access to the latest demand information about the specific high-risk categories in focus and bring a collaborative team together around it. For example, the use of advanced analytics on real time (POS) consumer data can identify shifts in demand across categories and regions fast and at an actionable level of granularity. Simple dashboards on a digital platform accessible to the common retailer-supplier team can then help to facilitate the collaboration process.
Full transparency and constant communication with respect to changes in the demand pattern will enable the retailer-supplier combination to act faster.
3) Engage in a collaborative and constant dialogue
For many categories future demand is expected to remain highly uncertain. A large fashion retailer commented that the key in creating flexibility is to start thinking from the perspective of the supplier and listen to understand what drives lead time and complexity from sourcing to dispatch.
This is becoming even more relevant in this Corona crisis. Collaboration can result in the retailer committing to multi-purpose raw materials and production capacity (to ensure supplier ability to supply), whilst both parties have a dialogue on the latest possible production moment and its batch size (to prevent over and under stock of specific products).
We started this blog by stating that we foresee a highly unpredictable and volatile period ahead. We see retailers responding in various manners. Some seem to try and push their problems upon their suppliers, others seek to enhance collaboration with their suppliers and take an end-to-end value chain perspective in addressing the challenges posed. We believe the latter will emerge stronger as retailer-supplier collaboration will proof to be a crucial factor to survive this Corona crisis.
Partner Retail at IG&H
Jasper van Rijn
Partner Retail at IG&H
Manager at IG&H