Since 2018, there has been a significant amount of Demand Volatility, and Supply-Side challenges worldwide due to the U.S-China trade war, the violent protests in Hong Kong, the Climate Crisis, and lately, the COVID-19 pandemic which is arguably more impactful than all these events combined. According to the United Nations, the coronavirus outbreak could cost the global economy up to $2 trillion this year.
Since January 2020, the manufacturing downtime has resulted in significant loss of production time and cost millions of dollars to the Manufacturers and Component Suppliers across major manufacturing hubs. The ongoing demand shock phase will put a lot of stress on the Manufacturers in the coming months. Currently, China controls 70% of the raw material market in the world. The manufacturers who have invested in machinery and heavy equipment with less exposure to manual labor will take a lot of time in recovery because the machinery has not been cycled for months. Also, the lack of specialized maintenance workers would delay the necessary lubrication of machines, preventive maintenance, and adherence to the statistical process control goals.
The enterprises are embracing the idea of Extended Supply Chain and exploring more vertical integrations. This would enable the manufacturers to diversify their risk and better prepared for the future crisis. For a long time, Toyota has mastered this by partnering with multiple supplier networks and supporting them at the crisis by offering them the liberal credit lines, engineering support, and providing financial services to revive them from the disaster.
The exposure of global logistics—which together with transport account for 10 to 12% of global GDP, or more than $8 trillion—has become starkly visible in the crisis. COVID-19’s economic impact will be felt most strongly in countries whose value chains are closely linked to epicenters of the disease, as disruptions in transport supply chains affect production nodes and cause cascading shortages of products—further worsened by hoarding.
According to Mikkel Hippe Brun (Co-founder Tradeshift), most of the supply chains in today’s ecosystem are fragile, and there are five reasons for this:
- Reduced Inventory Levels – JIT Manufacturing allows the companies to increase efficiency and lower the cost of their supply chain, but it also leaves the supply chain less resilient to sudden shocks and supply shortages.
- Rigid Supply Chains – Heavier reliance on Tier-1 suppliers and no provision for alternative suppliers.
- Manual Supply Chain – Still, a large percentage of supply chains are managed manually, making changes to orders or switching suppliers in a lengthy and complicated process.
- Lack of Supply Chain Transparency – No visibility beyond Tier-1 suppliers so can’t predict the threats to the production capacity.
- Consolidated Centers of Production – The globalization of supply chains has led to the development of specialist production zone – cities or countries.
A silver lining to the crisis?
Despite all this supply chain distress, production downtime, and revenue loss, the silver lining to this crisis is the massive lift in the e-commerce penetration as a percentage of total retail sales (27%) in the USA and the United Kingdom (33%) in the last two months. In a tweet that went viral on 16th May 2020, industry newsletter 2 PM posted the words, “10 years vs. 8 weeks,” followed by a chart showing that e-commerce penetration climbed to 27% from 16% in just eight weeks of quarantine. That was the same amount of market share growth it achieved over the prior decade.
According to Mastercard Spending Pulse report published on 10th June 2020: In the U.S., e-commerce in April and May made up 22 percent of all retail sales, up from 11 percent in 2019. Another way to put it? More money was spent online in the U.S. during that period than the last 12 Cyber Mondays combined. In April-May, more than $53 billion of incremental spending occurred on e-commerce channels in the U.S. In the U.S., demand for groceries remains elevated, with sales up 9.2 percent year-over-year in May across online and in-store. This is the strongest grocery sales volume for the month of May in Spending Pulse history. The focus on necessities is also highlighted by our U.K. estimates for April, when e-commerce spending on groceries increased 64 percent year-on-year vs. 16 percent year-on-year for luxury. Globally, we’ve also seen some redistribution of sales away from brick and mortar into online channels after the onset of the outbreak. In April and May 2020, e-commerce as a share of total retail sales reached 33 percent in the U.K. – an unprecedented high (ex. auto, petrol, and restaurants).
According to the CNBC report, Amazon, unsurprisingly, has been the biggest single beneficiary, focusing on essential household and medical items. Beyond the e-retailing giant, consumers have flocked to the websites of Walmart, Target and Best Buy, which all saw surging online sales in the first quarter at the expense of physical retail.
But there’s a wide swath of smaller sites and niche brands that were built for the internet shopper and are now seeing spikes in their business that they never could have anticipated. One of the leading categories is wine and spirits, which saw a 74% increase in online sales from March 11 through April 21, according to a report earlier in May’20 from Adobe.
This massive surge in the e-commerce penetration and demand volatility in the last 2 months has put a lot of pressure on the e-commerce supply chains of the large enterprises in the Retail, CPG and FMCG sectors, and negatively impacted their order lead time, service levels towards the customers, inventory fill rate risk, and the available safety stocks.
Ecommerce supply chain optimization in coming quarters
While there is no silver bullet to ensure success in an incredibly dynamic global market, here are five tips that should be considered to optimize your ecommerce supply chain to better prepare for the coming quarters in the current financial year:
1. Contingency Planning –
The contingency plan encompasses the worst-case scenarios for your business, such as severe weather events, labor problems, loss of major suppliers and vendors, and the pandemic situation. Contingency plans should include any circumstance that could send shockwaves throughout your organization. The goal is to think through your response before an event occurs, helping to shorten your response time. Another goal is to minimize the disruptions internally and for your customers. Some events may occur almost daily — transportation delays, material shortages — so your responses may already be well honed.
Begin your analysis by identifying the current state of the supply chain, including facilities, transportation costs and relationships, inventory levels and locations, and customer distribution facilities and practices. This is the baseline for the rest of the analysis, so it’s essential that it be as detailed and accurate as possible.
2. Improve Collaboration between Manufacturer/Supplier and Retailer/Marketplace for Demand Data Driven Forecasting and Inventory Management –
This will help organizations reduce inventory, improve fulfillment rates and product availability at point of purchase and ensure a lean supply chain improving margins and profitability. Today’s supply chain management should include a consistent look at optimizing inventory quantities. There’s a very real cost of holding and storing inventory, and it’s almost always higher than the generally assumed 20 to 25 percent. In fact, “Research reveals that inventory holding costs could represent up to 60 percent of the cost of an item that is held in inventory for 12 months,” as reported by Supply Chain Quarterly. To optimize your supply chain inventory, include forecasting and demand planning. Technology provides myriad opportunities to collaborate, there is a proliferation of data available to be mined and advances in computing power and connectivity allows us to test for optimality in ever increasing areas.
3. Focus on total cost of ownership (TCO), not price –
The major benefit of strategic sourcing is that it shifts the focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. For significant spend areas, procurement teams at best-in-class companies are abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price. Instead, they consider many other factors that affect the total cost of ownership. This makes good sense when you consider that acquisition costs account for only 25 to 40 percent of the total cost for most products and services. The balance (and majority) of the total comprises operating, training, maintenance, warehousing, environmental, quality, and transportation costs as well as the cost to salvage the product’s value later on. Establishing a “total cost of ownership” mindset is a goal that the supply management organization needs to embrace and perpetuate throughout the entire enterprise. It will not be easy, however, to convince your company’s executive leadership to truly prioritize value over price. Since the global financial collapse in 2009, most chief executives have focused on cost reductions, which they expect will translate to reduced prices.
4. Partner with a 3PL for Your Supply Chain Optimization Strategy –
For your company, an optimization initiative doesn’t happen often. But for an experienced third-party logistics provider, it’s just another day in the office. You can tap into their hard-won experience and apply it to your organization. While there aren’t easy answers, the process used to find the solutions can be reused, and there are some techniques that do carry over among companies. For example, building relationships with transportation carriers and warehouse providers is a proven strategy for better results regardless of the industry.
Lately, the relationship between shippers and 3PLs are moving from a transactional nature to collaborative nature, resulting in improved services and optimized supply chains. A 3PL can help optimize your network to create a dynamic and responsive supply chain.
5. SKU Rationalization –
In times of economic and business uncertainty it is critically important for a business to be agile and proactive with expense and working capital management. SKU Rationalization, also known as SKU Optimization or Product Rationalization, is the process to determine if a particular SKU (Stock Keeping Unit) should be kept, discontinued and whether a company should make changes to its inventory profile. Ideally this exercise should be done once or twice a year
The 5 supply chain optimization approaches described above do not represent a complete list of every action that top-tier supply chain management leaders are engaging in now. This list does, however, provide some ideas and perhaps a roadmap for a supply chain organization that is striving to be viewed as valued and relevant to its parent company.
The COVID-19 pandemic has reminded corporate decision-makers that there is a need to develop new business strategies in their future supply chain designs. The KPIs to be considered for the future value chain designs will likely contain both traditional metrics such as Cost, Quality and Delivery, and new performance measures included Resilience, Responsiveness, and Re-configurability.