By Andrea Hill
If you’re wondering how supply chains in general, and your up-and-downstream supply partnerships in particular, will change as a result of the coronavirus pandemic, you’re not alone. The past 12 months have delivered a series of supply chain shocks. Across all industries, the dynamics of supply chain behavior are being closely evaluated because these value streams hold the keys to profitability.
As novel as the coronavirus is, some of its effects are entirely predictable. Crises tend to amplify and accelerate existing trends. So to understand the impacts of the current crisis, it’s useful to reflect on the trends that were in motion prior to December 2019.
Supply chain behaviors were changing before the pandemic. Volatility was already a factor, driven by a swing toward nationalistic policies, trade conflict, the impacts of severe weather events, increasing social demands for transparency, and increasing sensitivity to unequal wealth distribution across supply networks. The jewelry industry was already grappling with the implications of being years—even decades—behind in its use of technology to drive business processes and decisions. And while some inventory deleveraging took place following the 2008 recession, the industry is still over-inventoried, which has dampened cash flow performance at all levels. All these trends have become more important to address since the first lockdowns occurred on January 23, 2020 in Wuhan.
Beyond the known trends lies the unknown. One of the most important, and least common, business skills is the ability to imagine the effects of the unknown. Not simply imagining the unknown, but imagining all the ways the unknown might unfold. That’s much more difficult.
And this is now our challenge: To imagine a future set of conditions based on an experience that has no precedent—a crisis experienced nearly simultaneously across the globe.
To envision what comes next in supply chain dynamics, we must consider two phases: the impacts of ongoing supply chain disruption, and how supply chains will reshape themselves for the long term in the process.
Once this coronavirus escaped its origin country, there really wasn’t any hope that it would be contained and snuffed out like SARS. Nor was it likely that it would emerge occasionally and get stamped out like Ebola. Its combination of infectiousness and stealth behavior pretty much guaranteed that we would have a pandemic similar to the 1918 Spanish Flu. People who were hoping for a quick lockdown and eradication are now dealing with the reality that we must live with modified social practices, flare-ups, and sporadic lockdowns until herd immunity occurs. The most optimistic models for that happening suggest 24 to 30 months, so ongoing supply chain disruptions are part of our short-term reality.
Interestingly, observations of global trade since February have shown that supply chain losses related to lockdowns are more related to the duration of the lockdown than to the strictness. While some business analysts are betting that partial lockdowns will have reduced impact, the data say otherwise. The data tell us that the longer the lockdown, the harsher the supply chain impacts. These impacts largely affect the supply side.
On the demand side, as we go into our second round of lockdowns in many countries, consumer confidence is taking a hit. During the first round, there was fear and anxiety but also a sense of novelty. Consumer confidence was not significantly reduced. Consumers found it more difficult to go out and spend, and there was a general disposition to conserve cash until the crisis was over, but confidence remained high. As the second round takes hold, polls that measure consumer confidence show that confidence is dropping. Economists have long theorized that if the pandemic played out in a cycle of flare-ups and lockdowns, consumer confidence would tank. The early evidence supports that theory. This will affect the demand side of supply chains.
Supply chains will react to these changes in many ways—some predictable and some entirely unexpected. And along the way, each reaction will introduce processes, policies, and realignments that will change the nature of supply chains in the long term.
Supply chains are a network of interrelated parts constantly in a state of reaction to one another. On the consumer side, a new trend can trigger a bump in demand for a style or material. That causes unexpected demand for the manufacturer. The manufacturer reacts to that demand by surprising the raw material suppliers. Since a consumer trend can affect many manufacturers at once, the raw material suppliers may experience a demand spike from several clients at one time, amplifying the effect. Raw material suppliers struggle to fill the unexpected need and then overproduce to accommodate the next round of orders, which may or may not materialize. Likewise, manufacturers ramp up to fulfill the demand now and tomorrow because they don’t want to be unprepared next time. The supply chain in this example goes from backordered to over-inventoried.
The worldwide trend toward more nationalistic trade behavior was already in motion prior to the COVID-19 pandemic, and this trend will continue to expand.
In the case of intermittent lockdowns, if there is not sufficient product in the supply chain prior to a lockdown, a similar series of reactions can occur. A supplier suddenly cannot get delivery for anticipated stock. Once stocks are flowing again, they may produce more stock to make sure they don’t experience the same problem in the future. At the point of retail, sales attention may shift from the products they cannot get to whatever is in the case or is available from the supplier. This can cause merchandising analysts to identify a new style trend, which they push into the supply network, affecting raw material suppliers.
In supply chain terminology, these are referred to as shocks and aftershocks, and this volatility could continue into 2021. Managing these conditions will require adoption of new tools and processes, which will change supply chain behavior from within—changes that are likely to remain part of the industry long after the crisis has passed.
The worldwide trend toward more nationalistic trade behavior was already in motion prior to the pandemic, and this trend will continue to expand. During the lockdowns, many manufacturers pivoted to producing goods for domestic consumption. As they start to open up and rebuild their economies, governments and industries will look for ways to protect that production, tax revenue, and employment. Trade blocks are opening to their own members before admitting outsiders, and tit-for-tat trade behavior is already occurring in tourism, travel, and goods. What are temporary measures now could easily become enshrined in regulations and tariffs—policy changes that are harder to unravel once put in place. We could be looking at 20 to 30 years of protectionist trade policies worldwide following the pandemic
Across the globe, even as civilization shuddered in anticipation of an unknown killer, people could not stop marveling at how nature responded to humanity staying in. The economic crisis triggered by the pandemic also heightened consciousness and concern about economic and social inequality, as evidenced by waves of protest around the world.
Anticipate increased consumer and regulatory pressure for industries to reduce their carbon footprint and commit to social justice and human rights in measurable ways. Even in the absence of new regulatory pressure, the jewelry industry must be prepared to address these issues to protect brands and reputations.
Statements about values and corporate social responsibility (CSR) policies that focus on local and employment issues will be insufficient in this new era. Supply chain transparency and responsibility are moving into the spotlight. Companies must define more robust CSR policies to improve responsible behaviors throughout the supply chain, and design processes and adopt technologies to fulfill those policies.
All levels of the supply chain quickly shifted from in-person and trade-event selling strategies to online selling strategies. These changes are more complex than most people realize. Channel shifts are more than just a change in the way goods are ordered or purchased; they also cause subtle behavioral changes in the way goods are researched, compared, and chosen. Sellers at all levels of the supply chain must anticipate changes in merchandise mix, prices, and buying patterns. The pre-coronavirus merchandising analytics, planning tools, and methods may not work in this new merchandising and selling reality.
Here’s an example of a trend that was already in place that will be accelerated and amplified by the current crisis: Over the past 25 years, consumers have come to expect more product variety, faster product and design cycles, and greater personalization. These demands put additional strain on suppliers to take more risks and manage inventories and supply chains more carefully. Many supply chain practices and technologies have been developed during this time, but the jewelry industry has not uniformly adopted them. This will need to change during the pandemic and beyond.
If your company does not have an inventory policy with supporting inventory planning guidelines and processes, it’s time to create one. Good inventory practices help organizations to determine optimal inventory quantities, timing, and value; increase customer satisfaction levels; and protect cash flow. Companies with strong inventory policies benefit from higher margins, better buying power, and stronger sales.
Since the 2008 recession, the jewelry industry has managed to inch up to nearly one inventory turn per year, compared to an average turn of 0.68 per year prior to that recession. These changes have come because of greater focus on reducing inventories at retail coupled with more conservative buying patterns and vendor financing. Most companies rely on a collection of spreadsheets and static reports to analyze inventory positions. But in the years to come, more sophisticated approaches to inventory policy will be necessary. Supply chains in other industries routinely collaborate with supply chain partners to achieve robust inventory performance. That collaboration requires technology and data sharing.
According to the recent Deloitt report, COVID-19: Managing Supply Chain Risk and Disruption, “Supply chains have become highly sophisticated and vital to the competitiveness of many companies. But their interlinked, global nature also makes them increasingly vulnerable to a range of risks, with more potential points of failure and less margin of error for absorbing delays and disruptions. A decades-long focus on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization has removed buffers and flexibility to absorb delays and disruptions. COVID-19 illustrates how many companies may not fully appreciate their vulnerability to global shocks through their supply chain relationships.”
POS Data Sharing helps manufacturers figure out what products to make and how many, clarifies which inventories are not moving, and allows partners to identify emerging supply and demand changes faster and with greater accuracy.
One of the most important ways to offset these heightened risks is the practice of POS Data Sharing—sharing inventory and sales data between supply partners. It helps manufacturers figure out what products to make and how many, clarifies which inventories are not moving, and allows supply chain partners to identify emerging supply and demand changes faster and with greater accuracy. Sharing data can mitigate supply and demand shocks, which existed before the pandemic and will be more pronounced until the pandemic is over.
POS Data Sharing requires the ability to pass data back and forth among suppliers and buyers, which requires technology and trust. Once the data is being shared, supply chain partners must have both the mindset and the ability to conduct analysis and make good decisions using the data.
In the jewelry industry, one true POS Data Sharing tool is already available. It’s called Balance to Buy, and it is software and a service of the Buyers Intelligence Group (BIG). This tool is already connecting suppliers and retailers in the industry, providing the basis for creating the inventory policies and planning programs that lead to more accurate inventory levels and stronger sales.
Economists are now predicting a deep recession, and while nobody knows how long it will last, there is growing consensus that it will last longer than the recession of 2008.
This means not only declines in demand, but also shifts in demand. Manual (or missing) demand planning processes will prove to be costly if you fail to identify opportunities and mitigate risks quickly enough.
Declines in demand cannot be addressed by simply cutting back production. Cutting back production itself can lead to a bullwhip effect as production is ramped down, overshoots the target, ramps up again slightly to catch up to the needed level, and causes a whipsaw reaction up and down the supply chain. This is referred to as inventory bounce, and it is a persistent risk whenever the state of demand is in flux. Finding an equilibrium between supply and demand is challenging during the best of times and extremely complicated during recessions.
Most of the modeling that companies currently rely on to anticipate demand and to smooth supply chains is based on several years of past demand data. But the international lockdowns were so unprecedented that historical data sets do not provide the insight needed to balance supply and demand in a COVID-19 world.
As we head into recession while simultaneously experiencing fluctuations in demand due to rolling lockdowns, demand planning software and the competency to use it are more important than ever.
Inventory policy and POS Data Sharing are just the starting point. Healthy supply chains now require adoption of technologies and practices capable of navigating complex relationships buffeted by external forces such as rolling shutdowns, trade wars, and changing consumer requirements and behaviors.
Today’s supply chains require aligned IT systems that include ERP (Enterprise Resource Planning), demand planning, logistics management on the supply side, and modern POS systems on the sales side. Spreadsheets, PDF reports, and static/flat files are not in real-time, are rarely standardized, and are difficult to share. They are the tools of the last century. Upgrading to modern tools will not only improve data visibility, but will also add value back into the supply chain.
One of the challenges of the past 20 years in the jewelry industry has been the increasing tension between suppliers and retailers. As retailers reined in purchasing and looked to suppliers for more financing, suppliers felt the squeeze and had to push back on raw materials. This caused a variety of problems, including commoditization and loss of margin throughout the supply chain. As with the other trends mentioned here, the consequences of the pandemic have already heightened this tension.
Squeezing margins is ultimately a zero-sum game. A better way to solve this problem is to introduce more vendor-managed inventory (VMI) strategies. VMI is the process of maintaining inventory at the buyer’s location. The mechanics can be different from industry to industry, but in the jewelry industry, it looks a lot like memo and extended terms. The problem historically with memo and extended terms is that the vendor is blind to what has sold, what hasn’t, and when they will get paid.
With the right systems in place, vendors and retailers can work together to anticipate customer demand, produce the right inventories at the right times, and maintain more balance in the supply chain. Industries using VMI strategies experience less waste and more value-add for all participants.
According to Mark Wolfson, chief technology officer of BIG, many jewelry industry brands and retailers are already using the Balance to Buy system to facilitate VMI practices. These organizations were in a better position going into the pandemic, both in terms of inventory levels and cooperation. They will also be in a better position to grab market share as other organizations struggle to adapt.
The pandemic has bolstered government interest in bringing back low-cost manufacturing for economic reasons, to boost employment, and for purposes of independence. This will require much greater investment in automation. In the past 10 years, all industries have been pursuing Industry 4.0 initiatives. The jewelry industry must ramp up efforts to adopt the technology and skills that facilitate low-cost production with higher-priced labor.
Technologies (including additive manufacturing, robotics, internet of things, artificial intelligence, and 5G) will be needed to replace the benefits of labor cost arbitrage (the practice of outsourcing production to countries or regions with lower labor costs) with the benefits of efficiency and effectiveness.
Workforce planning during lockdowns is difficult and sometimes impossible. Companies need to focus on workforce planning both during the pandemic and for the way work will have changed post-pandemic. For the remainder of the pandemic, rolling lockdowns, fear of exposure among employees and customers, physical distancing requirements, and accommodating children being schooled and cared for at home, will all present unprecedented challenges to labor planning.
The next challenge will come as companies repatriate some production operations. In many countries, it will be difficult to find sufficient trained labor to produce finished jewelry. In-company training programs and corporate/institutional partnerships should be under consideration now, as these programs take time to plan and launch.
Businesses with visibility to the full supply chain will be better positioned to anticipate shifts in demand, proactively alter supply chains to avoid disruption, and collaborate with supply chain partners to both take advantage of emerging opportunities and mitigate unforeseen problems.
With tools such as ERP, logistics management, and POS Data Sharing in place to achieve supply chain transparency, businesses will also be in position to meet growing demand for supply chain responsibility related to the environment and human rights. These tools make technologies such as blockchain much easier to implement in the downstream (though upstream challenges will be harder to solve). As reporting provenance and working conditions become requirements—if not as a regulatory step, then from the perspective of brand and reputation protection—the ability to track and report data will become a significant competitive advantage for companies that are prepared.
All these new technologies and practices will require a significant investment in learning, not just for employees, but for business owners and managers. The supply chain of tomorrow requires competency in using computers, analyzing data, and making analysis-based management decisions.
It is also time to upgrade management skills. More objectives-based management will yield better outcomes and will also lead to more effective management of remote-working individuals and teams, which are here to stay. Resourcefulness and adaptability are always at the heart of success during times of crisis.
The supply chain footprint is likely to shrink in the years to come. Efforts to repatriate some or all manufacturing processes will lead to more regional manufacturing assets. More effective use of operational control, data analysis, and technology in manufacturing and logistics will shrink the footprint even more. If the 1980s and 1990s were the era of labor cost arbitrage, the 2020s will be the era of efficiencies driven by technology and collaboration.
During a recent demonstration of the Balance to Buy platform, Abe Sherman, CEO of BIG, shared that the average retailer has more than 200 suppliers.
As retailers and suppliers gain greater insight into their shared investment in inventory, the number of suppliers per retailer is likely to shrink. It should shrink. Two-hundred plus suppliers is neither sustainable nor profitable for most retail businesses. On the supply side, when suppliers gain visibility to the performance of their products through POS Data Sharing tools, they uniformly shrink the number of customers and start to focus on the most profitable customers.
Though it may seem counterintuitive, shrinking a supply chain’s footprint does not necessarily shrink supply chain turnover. Both turnover and profitability tend to increase when suppliers target the right customers and do greater volume with a smaller number of clients.
Companies that had invested in supply chain risk management, manufacturing diversification, and skills development among employees and partners are already much better prepared to weather the COVID-19 crisis than their peers. This readiness will position them to grab market share in the years to come, as other companies struggle to catch up.
Companies that have engaged in collaborative, transparent relationships with their supply chain partners are also better prepared to respond to the challenges ahead. Collaboration—a key to future competitiveness in all industries—can provide capital, talent, insight, and market reach that businesses operating in opaque silos cannot access.
Companies that lack visibility to what is happening throughout their supply network cannot anticipate and avoid problems. Companies that do not have systems to help them model and project demand, manage inventory, and maintain inventory balance will squander precious cash flow on the wrong goods and lose sales in the process. And companies that do not enjoy the full collaboration of their supply chain partners will have to spend more money and energy to compete with companies that have engaged their supply chain partners directly.
Global supply chains will remain volatile throughout the pandemic and are likely to experience dramatic change in the next decade as companies realize that traditional linear supply chains with limited visibility from one point to the next will no longer deliver sufficient business value. Instead, end-to-end visibility, flexibility, and adaptability—supported by effective use of systems and data and powered by collaboration—will be the key to profitability.
That is the supply chain world we are headed into. Buckle your seatbelts, put on your thinking caps, and prepare to be energized. It won’t be easy, but I promise you, you won’t be bored.