COVID-19: Implications on inventory planning, sourcing and procurement
Supply chain experts give their take on how to navigate through uncharted waters
As demand rides a rollercoaster in the last few months, huge adjustments have been asked from businesses in every corner of the world and sector. It has been a huge challenge to understand what is changing moment-to-moment, let alone predicting what will happen, so eft by Reuters sat down in a webinar with experts working at the coalface of inventory planning and distribution to understand what can be done to survive and thrive.
Unprecedented demand fluctuations
The demand changes have been dramatic and unprecedented. For Pedro Paiva, Operations Director, EMEA for major footwear manufacturer Alpargatas, which owns the Havianas brand, they “Estimate that we will lose between 30% and 50% of sales this year.”
Alexander Wheeler, Target’s Senior Director, Food Supply Chain reinforced that garments and footwear are way down on the year. “What we’ve seen is a huge deterioration in the apparel sectors. So, the things that people don’t need on a day-to-day basis.”
This has really put a stress on our ‘old normals’ and what we thought were our capacities have almost doubled and that was only in [the space of] a month’s time
However, there has been a “50%” rise “in food and beverage essentials” for the retail giant, which has meant a huge reorientation in purchasing and demand planning. “This has really put a stress on our ‘old normals’ and what we thought were our capacities have almost doubled and that was only in [the space of] a month’s time.”
Alongside this sudden change in demand, there has been a shift in what channel that demand is being expressed in. Wheeler and Target have found “a huge demand change in how our guests interact with us. We talk about the shift to digital, we were prepared for an increase but even just in the first weeks of April we are seeing an almost 300% increase in digital,” which was already increasing “almost exponentially.”
Indeed, the demand changes are occasionally so significant that it might mean businesses move into lines of production and sectors that they have never addressed before. “We are producing masks for hospital,” says Paiva. “We have converted our production lines to do hospital footwear.”
The view on visibility
These sudden shifts mean that visibility is even more critical than ever before. “Visibility is the centrepiece … not only in terms of where my inventory is, in which channel, and where to move it, but also in consumer demand, and how can I be ahead of that game and forecast the demand?” says Harshad Kavinde, Strategy and Supply Chain Leader, Slalom Consulting.
Indeed, even for the biggest companies, there has been adjustment as the margins become finer in the current environment. “We are trying to answer really important questions, such as when will we be back in stock, to what items and how do we do that?” said Wheeler. “Questions that we haven’t had to ask in past because when you are a big enough footprint and have enough inventory levels, you can miss here and there. For the first time in a while we have been pushed and stressed to understand in certain markets how quickly can we recover? How can we position ourselves to do that? And having conversations on prioritising items and getting really heavy on the ones guests need relative to what we would call the tail that isn’t as necessary at the moment.”
My Tier-1 supplier but Tier-2, Tier 3 suppliers? What’s happening with them? How liquid are they? Can they meet demand in the future? Are there any disruptions in the sub tier supply chain and how will that affect me?
Kavinde notes that this also means taking a deep dive into your suppliers throughout your entire chain. “On the supply-side as well, how do I know more at the granular and reliable level about the supplier performance and not only my Tier-1 supplier but Tier-2, Tier 3 suppliers? What’s happening with them? How liquid are they? Can they meet demand in the future? Are there any disruptions in the sub tier supply chain and how will that affect me?”
Paiva also emphasises the importance of being robust from a supplier but also a transportation perspective. “We need to look at alternative sources of procurement, of production, alternative factories, alternative countries. Even the transport network is changing. I am sure that we will need to bring more via air than by sea and we need to pay for securing capacity on those options and we are prepared to do some order fragmentation.”
Overall, “Visibility is a means an end,” notes Kavinde. “The end is, how can I use that visibility to predict the scenarios that may happen in the future and take dynamic decisions, so that I can respond fast?”
We need to take risks on forecasting like never, ever before
Throwing out previous predictions
The challenge in doing so is that these economic conditions are not something that has been seen before. “We need to take risks on forecasting like never, ever before,” espouses Paiva. “We are conscious that these are different times and we will need to come out of our comfort zones.”
Indeed, we are so far out of those comfort zones that it means throwing out much of the received wisdom, “all the historical data, all the SOPs, all the algorithms, the big data that we have is on such a different scenario, that we don’t have anything that can give us any clue on the future, at least for us,” says Paiva. “To be honest, when people ask me … how we can recalculate, it is too tough, because we have never been through such a complex puzzle like this.”
Taking care of business
This doesn’t mean Alpargatas isn’t taking concrete steps to handle the crisis and protect the business for the future. This started with a decision to “form a COVID-19 steering committee, where we meet every single day for half an hour and take the fast decisions for any issues that come up on a daily basis. That steering committee leads the company on measures we need to articulate. We need to communicate with transparency to our people, to our key partners, to our customers. I think communication with clarity is one of things we focus on.”
One of the cool and surprising things for us was the flexibility of our team members
Wheeler has also seen the importance of people power and communication, “One of the cool and surprising things for us was the flexibility of our team members. So, when we closed down the things that don’t allow for social distancing, so you think about delis or bakeries or even our Starbucks team members, we were able to pivot them into the workforce to maintain what they need from a jobs perspective but also to help us to maintain our guests’ [experience]. That has been huge and very impactful for us.”
It has also meant Target has had to be strategic So, what we are doing is protecting our inventory
Being responsible, being sustainable, being also about what products it is focusing on in terms of meeting core demand. This is just as important for Alpargatas, which is seeing the other side in demand reduction. “We are reassessing and readopting the products and just producing those ones that offer the higher margins,” says Paiva, which means “what we are doing is not putting out discounts and we will carry most of the items for the next season.”
In the longer term he says they are focused on “Diversification of sourcing, reducing the dependence of single-source suppliers, and developing relationships with the key partners or IT [vendors] … and invest like no other into demand planning and control towers to give us the most fine-tuned information,” and ability to start making “crystal-ball like” predictions.
Whether it’s about trying to be strategic about positioning inventory in our distribution centres or in our stores or even using same-day delivery services, all of those things become an optimisation conversation
Wheeler is also looking past the crisis to investing into the future so they can come out the other side as best prepared as possible. The most prominent question they are looking at is e-commerce and delivery. “I’ve seen a very heavy reliance on same-day delivery services,” which has “put a strain [on us] but also a really good understanding for us how this will look like in the future.
“What we are really trying to put a mark on is how do we do it more profitably. There’s different views in the industry on how we shift that potential long term and whether it’s about trying to be strategic about positioning inventory in our distribution centres or in our stores or even using same-day delivery services, all of those things become an optimisation conversation.”
It is therefore important even in the midst of this crisis to continue to think about how to continue to make technological improvements. “People are rethinking their previous digital initiatives to gear more towards the goal of increasing visibility,” so that they can react quickly says Kavinde. “The renewed focus on understanding that digital backbone is going to be super important to gain that visibility. Right from the supplier mapping to understanding the consumer better.”
Upcoming virtual roundtables & webinars to sign up for:
Thursday 14th May – 3PM BST / 10AM EST
Friday 22nd May – 3PM BST / 10AM EST