The impact of Coronavirus on retail supply chains

Retailers around the world are grappling with the appropriate response to the Coronavirus (Covid-19) for their employees, customers and their business. For many, it is shaping into a once-in-a-generation test of business continuity planning and supply chain flexibility.

Unlike previous pandemics such as SARS or Swine Flu, the disruption from Coronavirus is having an impact on both retailer’s supply and demand. In addition, a country-specific set of policy responses are further contributing to uncertainty. On the supply side, the outbreak in China has had a severe impact on retailers due to the sheer amount of clothing manufacturers in the country. According to the World Trade Review in 2018, China is the world’s largest exporter of textiles and clothes. The country produces over $118.5 billion of textiles and $157.8 billion of clothing per year. Manufacturing in many cities all but halted following the Covid-19 extended Chinese New Year, and even now is still constrained. It will take some time until the supply side of the equation returns to full capacity.

On the demand side, we are already seeing changes in consumer behaviour, with visits to retailers dropping dramatically following the outbreak. In the US the February data from RetailNext Performance Pulse shows a drop in sales and traffic by 4.4% and 6.5% respectively. And March will be worse; early numbers for the first week of March in the US show traffic down 9.1%, according to Morgan Stanley analysts. This is a key issue, given that a majority of retailers still depend on physical purchases for revenues. The move from shopping in-store to online during the pandemic is only set to increase as a result. According to new research from Post and Parcel, home shopping is likely to double from 20% of all retail sales to 40% over the next few weeks.

The fall in supply and change in consumer demand will have a significant impact on retailers. It will shake their business models and force them to focus more heavily on digital channels as sales move from offline to online. It will also test the degree of flexibility in retailers’ supply chains as the virus pushes inventories to the brink.

Exposing supply chain flexibility

One critical area that will be tested by this crisis is the degree of flexibility and redundancy in retailers’ supply chain. Variability puts stress on supply chains, increasing storage costs and inventory carrying costs, while simultaneously increasing costly faster delivery for in-demand items. Companies further down on the path of digital business transformation will be better equipped to handle this disruption.

The application of technology and data can help retailers navigate the uncertainty that Covid-19 is set to have on the industry over the coming weeks and months. And indeed, any future crises. For example, technologies that provide inventory visibility across a distribution network (for example: distribution centres, stores, vendors, third-party providers and wholesale inventory) allow retailers to move supply to areas of greatest need. In addition, investments in fulfilment optimisers and store picking algorithms will allow retailers to deliver more products and deliver them more efficiently – in terms of both price and customer experience.

Best tools, best response

What will be interesting is seeing the impact of new versions of established tools – such as supply chain control tower solutions – which play a critical role in helping supply chain managers to have an ongoing view of potential risks and issues and provide framework to help take corrective actions to better serve their customers. Meanwhile, even AI and machine learning tools may struggle with the unpredictable twists and turns of the coming retail markets – as their human managers before them, they are used to playing by existing rules and may struggle to cope in this new reality. The onus, therefore, will be on careful management of tools both new and old to ensure responses can be as effective as possible.

Supply sourcing

We’re seeing more retailers question their sourcing strategies. Balancing sourcing resilience and flexibility with cost was already on the list for many retailers, and this crisis has put pressure and urgency onto those already important questions. With the desire for more unique, customisable products, and a need for more speed, opportunities do exist in sourcing near-shore as well as offshore. The spread of coronavirus might just be another reason for retailers to consider introducing more supplier flexibility across the board.

Coronavirus, therefore, accelerates the need to discover new ways to increase flexibility in the supply chain and to understand which tools are most critical in the handling of unpredictable events – but current models will be pushed to their limits, and those who are further along the digital transformation journey will be grateful for the past investments.