Covid-19 and the Impact on the Retail Supply Chain

We have forgotten that the heart of the textiles industry used to be here in the United States. As labor and quota costs rose in the 1980’s, one by one manufacturing companies moved production of everything from apparel to wash cloths to bed linens out of the US.               

As production moved to Asia, the procurement process required more sophistication. Letters of credit, production reservations, and piece good commitments posed new challenges. Many of these processes occurred via fax and phone calls. The factors of distance, time, and language elongated and complicated the supply chain. The solution has been the application of progressively more sophisticated technologies.                     

To maintain profitability there has been continuous pressure on retailers and wholesalers to squeeze inventory out of the system. The emergence of technology in the 2000’s focused on Supply Chain optimization enabled that trend.

From product inception to final disposition to the consumer, every action of the supply chain was scrutinized to assure maximum efficiency and profitability.

The good news is that regional and global retailers got very good at controlling the components of the supply chain. Countries like China became very adept at working with the global retailers and adapting the practice of the leanest possible supply chain. Global logistics providers have optimized the transportation process where goods from various vendors are coordinated to maximize capacity of shipping containers. Most of the inefficiency has been squeezed out of the supply chain.

The Short- and Long-Term Impact of COVID-19

The bad news is that all the investment put into making the supply chain efficient is now working against all participants. As we are experiencing with the impact of the Covid-19, the impact is widespread and sweeping. Simply put, factories have closed, Transportation (from factories to ports) are extremely limited, and the loading of cargo onto ships has been affected. The Chinese Government has focused all its energy on minimizing the impact of Covid-19 on its people and is willing to live with the ripple effect that this causes throughout the global supply chain. Procurement of products from Italy and other countries will also be affected, possibly more severely than China.       

The impact is real for retailers here in the US:

Short term:

• According to the National Retail Federation (NRF) there has already been a significant drop off in the number of containers coming into the ports in California.
• The reduction of global flights will reduce available freight capacity while putting upward pressure on the cost structure. 
• Retailers are already seeing impact on late deliveries of spring/summer products. This will affect the offering and assortment to consumers.    
• Many retailers have closed their doors for an undetermined period of time.   

Medium Term:

• Fall deliveries will be late. It’s too early to know how late, but every forecast indicates that it will be at least two months. 
• Market trips, both foreign and domestic, have been severely curtailed. This will cause a longer-term disruption in the supply chain.
• The suspension of many of the industry’s top fashion shows (globally) over the past few weeks will likely continue for the next few months. This will affect the established cadence of bringing fresh goods to consumers.      
• There will be a latent effect for Holiday (2020) and will also affect Spring 2021.        

Long term:

• There must be recognition that there are factors outside of our normal view of the world that can quickly affect the global supply chain.      
• Retailers will have to recognize more fully the risks associated with the just-in-time inventory practice. They will have to come up with mitigation plans to account for the reality that these types of disruptions can and will occur.
• Though the disruption caused by Covid-19 has been entirely medical, the possibility of political instability in various countries must also be a factor in the consideration of inventory management approach.
• A knee-jerk reaction to the current situation might be to consider moving production to an onshore model, however, the margin reality of this is simply not sustainable.
• There are a growing number of events that will impact the global supply chain as much as the Covid-19 Pandemic and will be far more persistent. Factors like global warming, displaced population and migrations, as well as raw material scarcity and reallocation of resources are becoming the new normal.     

Managing the Perpetual Inventory

Retailers have become adept at understanding the demand of consumers and matching a flow of products to keep them engaged and enticed to buy. Though managing the typical vagaries of the occasional late delivery is a part of everyday life; the disruption caused by the Coronavirus will be a significant challenge as the huge troughs and peaks of inventory work their way through the supply chain.

The full implication of moving from a just-in-case method of inventory management to a just-in-time method are now manifest. The disruption on both the supply chain and demand from consumers will likely take a full year to get reconnected.