16 November 2020
What is the impact of Covid-19 on the future of retail supply chains?
The COVID-19 pandemic has caused a sudden and severe impact on international trade, investment and global economic growth. As nations grappled with the impact of the virus, factory closures throughout international markets caused a ripple effect across an expansive supply chain network, quickly leading to disruption across the world.
Retailers across Europe experienced a significant shock to both supply and demand on an unprecedented scale, compounded by government measures which restricted the movement of people and goods. Certain governments imposed unilateral export controls on specific goods to protect domestic supply, while others reduced tariffs to encourage trade. Meanwhile, tighter border controls slowed the ability for goods to seamlessly transit through countries. While these measures were temporary, the impact across supply chain networks could cause longer-term distortions.
Global trade volumes fell sharply in the first half of 2020, pulling down global economic growth. The International Monetary Fund (IMF) forecasts a decline in global growth of 4.9% in 2020, although the Euro Area (-10.2%) and the U.K. (-10.2%) are expected to experience sharper slowdowns. World exports contracted by 19% in the six months to May 2020 (Figure 1) and are expected to fall in the region of 13% to 32% across 2020, according to the World Trade Organisation (WTO).
As the flow of goods seized up in countless locations, many households across Europe struggled to access basic consumer products in the immediate aftermath of the pandemic. In some parts of the market, the supply-side shock combined with a surge in demand, especially across grocery supply chains. This forced retailers and brands to acknowledge the fragility of some modern supply chains. [Extract - Download the full report for more insights]
Shifting supply chain dynamics
Prior to COVID-19, international supply chains were already in transition. Increasing pressure over Environmental, Social and Corporate Governance (ESG), the impact of technology, Brexit and increasing geopolitical volatility underscored the importance of supply chain security.
Businesses are being forced to reassess the future of their supply networks and how they can not only meet COVID-19 related challenges, but simultaneously address underlying structural challenges to ensure they are future-proofed.
Impact of Covid-19
COVID-19 has highlighted the fact that globally dispersed and complex supply chains are only as strong as their weakest link. As businesses assess the impact of the crisis and future gaze, new supply chain strategies are emerging as industries adjust to the new normal.
Strategies are likely to involve using shorter, more flexible and resilient supply chains better equipped to deal with supply shocks, but also address rapid changes in consumer behaviour witnessed in recent months (covered in our ‘The Shape of Retail: Consumers and the New Normal’ report).
Improving supply-chain security is likely to involve a combination of:
- Simplification: with shorter supply chains using more on-shoring, near-shoring and re-shoring.
- Diversification: more sources of supply, reduced reliance on single countries (e.g. China +1/+2 models) and single suppliers.
- Rethinking inventory: establishing alternate supply sources to enable fast-tracked volume delivery capability. Adopting better, more agile inventory policies to maintain ‘just-in-time’ strategies with established mitigation.
- Understanding cost to serve: any move to near-shoring will have an impact on margin due to local cost differences. Build an understanding of these differences to build mitigation options and pricing scenarios. There is a clear trade-off between agility, and inventory write-offs.
The impact of COVID-19 has exposed the over-reliance on single suppliers and single-country supply routes for many businesses, forcing them to consider supplier diversification and even dual-sourcing to ensure supply continuity.
Our research found that almost 70% of retailers surveyed had conducted a review of their supply chains as a direct result of COVID-19. From detailed conversations, many were at pains to report the significant work that had already been conducted around Brexit planning, so they were better positioned to deal with the impact of the pandemic.
Nevertheless, the sudden and severe impact on supply chains forced action, with more than half (55%) of retail respondents reporting they had already diversified a number of their supply chains. Other measures included reducing product ranges (30%), near-shoring (23%), diversifying sourcing countries (15%), on-shoring (14%) and increasing inventories (5%). However, there was a marked difference between food and non-food retailers, with agri-food supply chains appearing to be much more flexible for switching suppliers and sourcing countries. [Extract - Download the full report for more insights].
Considerable uncertainty remains over the future relationship between the U.K. and the European Union (E.U.). Whatever the outcome, there will be significant repercussions for supply chains for European retailers, particularly those U.K. based. After all, the E.U. is the U.K.’s largest trading partner, accounting for approximately half of both imports and exports of goods. Supply chains between the U.K. and the EU are highly interwoven throughout the entire retail industry.
While domestic production of food in the U.K. accounts for around 60% of consumption, three-quarters of food imports currently originate in the E.U. Likewise, the E.U. accounts for a significant proportion of U.K. imports for electricals (47%), health and beauty (69%), apparel (39%), DIY and gardening (61%) and furniture (48%).
Although both sides are keen to strike a deal, the end of the transition period on 31 December 2020 moves ever closer. Both parties are still far apart on important issues like fisheries and state aid, and as time runs out to resolve differences, the chances of a no-deal outcome increases. If a no-deal scenario emerges, retailers will be affected in four main areas: (1) supply chain issues; (2) border friction; and (3) increasing tariffs and (4) the speed of goods transitioning into and out of the country and its impact on inventory, therefore working capital
Deal or no deal?
In the event of a no-deal, moving goods between the U.K. and the E.U. will become more costly and problematic. There is also likely to be an immediate interruption to supply as retailers grapple with new U.K. border requirements which could cause significant delays.
The magnitude of the impact could also be exacerbated by Christmas timing, restricting retailers’ ability to stockpile essential products because of limited warehousing space. New rules and procedures (e.g. paperwork, customs systems, permits, testing requirements) will affect many different industries. The common impact on all European businesses trading across the Channel is increased cost and complexity. [Extract - Download the full report for more insights].
Rising tensions between the U.S., China and the E.U. have created considerable uncertainty within the international trade environment, impacting foreign direct investment and influencing supply chain strategies for many international businesses.
War of words
Confidence in the global trading system has been significantly undermined following aggressive and unpredictable interventions by the U.S., including the sudden imposition (or threat of imposition) of new tariffs that do not conform to WTO rules. U.S. action has also undermined the effectiveness of the WTO to rule on trade disputes between countries. U.S. measures have also led to retaliatory tariffs from major trading partners, including China and the E.U. These ‘retaliatory’ or ‘rebalancing’ tariffs are frequently applied to U.S. food and consumer goods such as soya beans (China) and jeans, whisky and orange juice (E.U.), leading to mutually harmful tit-for-tat trade restrictions.
Global trade disputes could escalate further as the WTO is set to grant the E.U. authority to impose extra duties on $4 billion of U.S. imports to the E.U. This is in retaliation for illegal subsidies granted by the U.S. government to Boeing. It raises the real prospect of U.S. tariffs against E.U. imports in response to illegal state aid to the European aerospace industry; this comes at the same time E.U. tariffs are being applied to trade from the U.S. in response to state aid to U.S. aerospace. This mutual retaliation might bring a long-standing (16 year) dispute over large civil aircraft to ahead. Meanwhile, it could inflict unwelcome collateral damage on a range of totally unrelated sectors such as retail products on the two sides exercise their option of applying retaliatory duties.
The impact of COVID-19 has only fuelled further risks in the rise of protectionist trade policies and the resurgence of nationalism. We have already witnessed the potential implications of these trends during 2018-2019 as the U.S. and China became embroiled in a trade war. As uncertainty escalated, ever-changing trade policies forced businesses to boost operational flexibility to adapt to swift changes in trade flows.
Ongoing uncertainty in the international trade environment and foreign investment will lead to shifts in goods and investment flows. This will increase impetus to ongoing supply chain diversification while adding to the perceived value of geographic diversity in supply chains. [Extract - Download the full report for more insights].
Sustainable supply chains
Early in the pandemic, apparent concerns around sustainability were at risk of falling to the wayside as firms focused on survival. However, as the initial shock resided, businesses and governments are considering how to build back better, with sustainability playing a major role.
The crisis has highlighted various compelling ESG-related scenarios that cannot be ignored as economies look to rebuild. This will influence the future of international supply chains. These driving forces include:
- On-shoring/re-shoring/near-shoring – an obvious benefit of on-shoring is likely reductions in transportation carbon emissions.
- Regulatory incentives – Government rescue packages will incentivise investment into digital and green technologies.
- ESG targets – retailers will face increasing pressure for transparency of their ESG standard, including supply chain management and emissions data.
- Consumer behaviour – awareness of consumerism and its impact is influencing behavioural change with rising demand for sustainably-produced products.
Shorter supply chains help produce fewer emissions
Around 22% of global greenhouse gas emissions are attributable to the production and distribution of traded goods consumed abroad³, around a third⁴ of which are directly linked to trade-related freight transport. Shortening supply chains will abate some emissions embedded in the international transport of goods, encouraging businesses to move supply chains ‘closer to home’, while a more carbon-efficient local production base would also present obvious benefits.
However, the potential reduction in carbon emissions is not always clear-cut. For example, more carbon-producing transport methods (e.g. road and rail compared to ocean freight), decouple the straightforward relationship between distance and carbon emissions. Other factors like the speed of freight are also important. Reducing the speed of ocean freight (thereby increasing the time in transit) can yield significant carbon reduction. Nevertheless, on-shoring will also help European retailers reduce their exposure to regions with potentially higher social risks associated with poor labour conditions.
Technological advancement has revolutionised supply chains in recent years. The drive towards efficiency has streamlined supply chains, from warehousing robotics and autonomous ships to computerised shipping and tracking. Whether it’s greater efficiency, better communication or enhanced transparency, the supply chain continues to evolve at pace, and the role of technology is central to future development.
The COVID-19 crisis has put even greater emphasis on using technology to build more resilient supply chains. Indeed, the WTO noted that the pandemic has led to accelerated trends towards digital trade and increased use of electronic communication, creating growth in business-to-business e-commerce.
Technological innovation and adoption will shape the future of supply chains, driven by:
- Digitalisation: the buyer-supplier relationship will make identifying, recruiting and switching suppliers more efficient and build stronger supply chains
- Automation: its impact has the potential to make it more economical to manufacture closer to domestic economies.
- Artificial intelligence: to pre-empt supply chain disruption, utilise big data, waste reduction, cybersecurity, autonomous vehicles and identify opportunities.
Artificial intelligence (AI)
Traditionally, the application of artificial intelligence within supply chains has been focused on demand planning, forecasting and waste reduction. Machine Learning (ML) techniques have been applied for many years to improve and refine processes to boost efficiencies.
However, artificial intelligence is now permeating all stages of the supply chain, from sourcing raw materials and connecting with customers, to encouraging brand loyalty. For example, ML is being used to adapt to changing conditions and priorities in warehouses and distribution centres. While ‘pick density’ might be an initial priority, as carrier cut-off times approach, priorities may shift to meet other obligations in an automated manner.
Big data fuels AI systems; and ML supply chain applications will need big data platforms to collect, cleanse and organise data – turning it into actionable insights to improve supply chain efficiency. For example, in August 2018, JDA Software completed the acquisition of Blue Yonder, a market leader in AI solutions for retail and supply chains. The acquisition accelerated JDA's vision of an Autonomous Supply Chain by leveraging the Blue Yonder platform. It connected their Service Control Point (SCP) systems to external data – particularly social, news, event, and weather data – enabling more automated and optimized business decisions. The ambition is for retailers to be able to leverage an end-to-end supply chain solution with integrated AI to provide better planning, analysis and execution on a cognitive, connected platform. [Extract - Download the full report for more insights].
Sensitivity analysis: The impact of onshoring
As retailers prioritise building more resilient supply chains, the prospect of sourcing products from domestic economies (on-shoring) emerged as a strong theme for many. Our research revealed that some retailers had already begun to source more domestically as they looked at alternative strategies to mitigate the impact of supply chain disruption.
Furthermore, our research highlighted that other underlying motivations around the impact of Brexit, carbon reduction ambitions and consumer behavioural change combined to add further weight and, in some cases, urgency to this strategy.
As part of our research, we conducted a retailer survey that includes data from over 30 of the largest European retailers with a combined turnover of €600 billion. In-depth interviews were conducted to understand better the motivations, desire and ability for businesses to generate greater sourcing capabilities from their domestic markets.
Interviews were also conducted across a range of industry experts including financial services, government departments and industry trade bodies.
Leveraging these data and insights, we estimate that across the six European countries covered in the research (U.K., Italy, Spain, France, Germany and France) c.$31.5 billion worth of trade could be on-shored over the coming 12 months, equating to around 3.6% of total imports of retail products across these countries. [Extract - Download the full report for more insights].
Opertational Toolkit: Strategies to navigate through the Covid-19 crisis and beyond
International supply chain networks are transitioning through a period of intense change, affected by significant interconnected forces. The impact of COVID-19 acted as a catalyst for businesses to review and prioritise strategies around building more resilient supply chains that are fit-for-purpose in the context of increasing geopolitical volatility and pressures around ESG.
Many retail businesses could see this as an opportunity to ‘reset’ their thinking around supply chains. For some, immediate measures are necessary to protect the viability of their businesses; but further out, more strategic decisions will be required to future-proof operations for long-term success.
1. Workforce management
For most retailers, business continuity will largely hinge on their ability to intelligently manage their workforce throughout their supply chain, whether it’s on the shop floor or elsewhere in the supply chain.
The majority will require visibility over their tier 1 suppliers and develop relationships that instil confidence that adequate measures are in place to limit the risk of plant closures. This will be critical when planning for periods of peak demand such as Christmas and Black Friday. Factories, distribution centres and logistic providers are at risk of running at reduced capacity because of control measures, such as social distancing, or illness. In the event of reduced capacity, understanding how allocation priorities will be treated will also be essential in minimising the impact on businesses. What’s more, the ability to re-route distribution to different distribution centres can help manage capacity constraints.
It will also be critical for retailers to prepare succession plans for vital positions throughout the supply chain, ensuring key executive (and management) positions have adequate cover, should employees need to self-isolate or become ill. These plans should consider both short-term and long-term implications, preparing for all eventualities at all levels of seniority. [Extract - Download to read more].
2. Agile planning
Contingency planning across the business will be vital in reducing risks and identifying ways to mitigate the impact of the virus. Retail brands will need to assess the impact in both financial and operational terms and also develop solutions that limit the impact of supply chain disruption.
A continuous review and risk assessment of supply chains is needed so that businesses have built in the necessary flexibility to switch suppliers, operate parallel supply chains if needed, or switch supplier countries if localised disruption persists. Identifying the weakest links in supply chains and understanding the impact that disruptions could have in meeting supply requirements is critical.
To operate in a fast-paced, dynamic environment, having complete visibility of supplier inventory, production capacity and live order fulfilment status will be essential. Where possible, it will also be important to trace extended supply chain networks to assess risks further down the supply chain. In addition, the ability to conduct risk assessments of Tier 2 suppliers and plan for potential disruption (e.g. seeking out alternative suppliers to keep plant operation near full capacity) will be extremely important. This will require companies to quickly adopt a digital-first approach. [Extract - Download to read more].
3. Digital transformation
The imperative for businesses to adopt a ‘digital-first’ approach to their supply chains has never been more pressing. It will become the norm for intelligent retailers to quickly identify bottlenecks in supply chains and to pivot towards alternative suppliers to ensure supply continuity.
However, this will require antiquated paper-based systems to be replaced with digital supply chains to drive greater transparency, faster and more data-driven decision making.
COVID-19 may accelerate the use of Internet of Things (IoT) hardware, which links the physical and digital worlds. Leveraging data science and analytics to bring real-time visibility across the entire supply chain will help achieve greater precision and efficiency. Providing a detailed view of stock, sales, orders, deliveries, and returns across all channels will enable more accurate demand forecasting, better inventory management and deliver important cost savings.
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