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Wed 8 Apr 2020 04:13 PM

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Why are retail supply chains struggling?

The current pandemic is so disruptive to supply chains that it has interrupted two of the 'principal flows' that supply chains require to work efficiently, namely, the movement of goods and the exchange of information

Why are retail supply chains struggling?

Stuart Milligan is course leader, MSc International Logistics and Supply Chain Management, University of South Wales Dubai.

The Covid-19 crisis is more severe and widespread than any other supply chain disruption in recent history.

Due to the vital role that the Middle East plays in global trade, connecting China with the rest of the world, supply chain disruptions have hit the region hard and have significant consequences for the rest of the world. One sector which has been hit particularly hard, is retail.

Supply chain disruptions in retail are commonplace; retailers are highly adept at expertly dealing with issues relating to continuity of supply or fluctuations in demand without the customer ever realising there was a problem.

So, what is so different about Covid-19? Simply stated, the current pandemic is so disruptive to supply chains that it has interrupted two of the “principal flows” that supply chains require to work efficiently, namely, the movement of goods and the exchange of information. Covid-19 has highlighted the fragility of many global supply chains, so what is the likely impact of the pandemic going to be?

Offline and online

Disruptions such as Covid-19 are interesting from a retail supply chain perspective. They are interesting because they affect retail channels differently and they affect retail sectors differently. These differences arise from the ways in which these retailers manage their channels of distribution and their channels of marketing.

Broadly speaking, retailers are typically concerned with offline and online channels of distribution, distributing either food or non-food items, and they are concerned with channels of marketing, or touchpoints. Offline touchpoints are things such as in-store experience, whereas online touchpoints are things such as social media and digital advertising.

Offline channels of distribution and marketing are much easier to control. This is partly because they are better understood, owing to the fact that this is the retail model that has been operated for the last 50 years or so, and also because it is constrained by geographical and social boundaries.

Traditional bricks and mortar stores tend to have a very predictable sales pattern overall. While it is impossible to predict how many customers are going to shop in a store at any given time, the local population and the local competition doesn’t change drastically overnight, so it is possible to forecast sales with reasonable confidence. For example, it is likely that in normal trading periods, sales in the local Carrefour or Geant store will only vary by a few percent each week. Seasonal variations are managed based on year-on-year performance with a weighting for any known activity.

Forward planning

Typically, sales activity is planned 12-15 months in advance and shared with suppliers. Forecasts are then updated, usually six weeks out, four weeks out, and two weeks out, and then finally two to three days out to allow the supply chain to fine tune volumes required.

For grocery retail this predictability is vital, as the food supply chain is not quick. Retailers need to be engaging with farmers at least twelve months in advance to advise on how much fruit and vegetable produce is required by week. The fruit and vegetables we are buying in April 2020 were probably originally discussed with suppliers around December 2018.

This is why crises such as Covid-19 are so disruptive to grocery retailers - such disruptions could not have been predicted 15 months ago, even six weeks ago, as the picture wasn’t so clear. When consumer patterns change so dramatically, so quickly, the offline supply chains, irrespective of retail sector will struggle.

From a planning perspective, the assumed volumes are wrong – either too high or too low for each Stock Keeping Unit (SKU), so buyers need to urgently work with suppliers to make sure the right stock gets to stores. In distribution centres, stock will need to be urgently transhipped between depots, to balance capacity and availability, and resource needs to be increased to cope with the extra stock to be picked and delivered.

Holding stock

In online channels, the situation is more complex. Without the geographical or physical constraints of the offline channel, online channels can engage with any customer, anytime, anywhere.

Online channels offer many more SKU’s. Noon.com, for example offers around 20 million different products, compared to around 15,000 food SKU’s in a large grocery retailer. This means that they have to hold a lot of buffer stock in their distribution centres and have close relationships with their suppliers to be able to ship products with very short lead times.

Online retailers are much more proactive than offline retailers with regard to marketing channels. Offline retailers typically rely on in-store displays, point of sale advertising and promotions to sell certain lines. Online retailers use programmatic advertising to target shoppers with products they are likely to buy, based on their profile, browsing history and previous shopping habits. These key touchpoints are the go-to tools that retailers rely on to stimulate demand and move lines through their supply chain.

Good news

Covid-19 is affecting online retailers in more extreme ways than offline retailers. Online grocery retailers, such as Bulkwhiz, are seeing significant increases in demand. Non-food online retailers, in comparison, are generally seeing a decline in sales resulting in excess stock which has to be cleared to maintain cash-flow. For example, Noon.com are offering a 47 percent discount on the iPhone XS and 30 percent-45 percent discount across fashion lines in attempts to shift excess inventory. Conversely, items such as laptops have seen a surge in sales, as parents prepare for home-schooling.

The disruption presented by the current Covid-19 crisis is damaging for the entire retail sector, food and non-food, online and offline. The disruption has caused the sector to operate inefficiently.

It is true in supply chain management that most problems disappear if you throw enough money at them, and this is exactly what retailers are being forced to do now. The increased sales will not necessarily be the most profitable because of the upstream operational resources required to get the goods to market, and clearly, the excess of inventory and the store closures will result in inventory that is not being exchanged for cash and lost sales.

The good news is that it shouldn’t last too long, hopefully shops will be open again soon and an equilibrium will be achieved in the retail supply chain between suppliers, distribution capacity and sales demand – it always does!

Stuart Milligan is course leader, MSc International Logistics and Supply Chain Management, University of South Wales Dubai

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