Extensive Demand, Panic buying, Out of stock, Not-Operational, COVID-19. The current situation of the global retail industry can be explained in these five phrases today. There is no end to the rise in product demand due to the lockdown situation in India and most countries of the world. As per a government notification, only essentials services stores and outlets can remain open, which has resulted in immense pressure on the supply chain industry currently.
The Logistics & Supply chain (L&SC) arm of retail is one of the main constituent of a country’s economy. An efficient supply chain management has a cascading impact on all aspects of retail – from sourcing of raw materials based on demand forecast and then speeding up the production to getting the product to the store and finally to the consumer, everything depends on the L&SC. The pandemic, which took the world pretty much by surprise, has pushed up the demand of essential goods. Unfortunately, the COVID crisis has created a serious risk to supply chains, as manufacturers and retailers face the possibility that suppliers will halt production, and they won’t be able to replenish run-down stockpiles.
There has been a huge drop in the level of ‘stocking and trading’ due to supply chain disruptions. People are thronging stores and e-commerce sites to panic buy and stock food and FMCG essentials. On the other hand, there is an absence of workers at manufacturing plants and farms due to the nationwide lockdown, leading to a significant disruption of the supply chain. Not only are deliveries delayed, but the industry is running on stocked supplies, which won’t long last long.
The next few weeks will prove to be the testing ground on how supply chains are able to keep pace with the temporary rise in consumption of essentials. This will also be the time when retailers can look past the shortage buying which is happening currently, assess real customer demand and order and stock inventory accordingly.
Meanwhile, the industry as a whole will need to look at a way to overcome the supply chain crisis, because once normal buying begins post lockdown and consumers start shopping for non-essentials (apparel, electronics, gadgets, and other household utilities), the situation will become more stressful.
What Experts Say
According to KPMG’s latest report, the lockdown market size of retail and consumer industry is US$ 950 billion (2018-2019) but the coronavirus pandemic and the lockdown together have brought economic activity to a complete standstill.
“Managing retail and CPG supply chain in times of COVID-19 requires some creativity and visionary leadership. The conventional wisdom regarding just-in-time inventory and flow through replenishment works in times of business-as-usual. But as everyone is finding out the hard way, such models cannot handle significant supply chain disruptions. Maintaining higher inventory levels may cost 0.3–0.7 percent more; yet in a crisis, the higher inventory levels pay off in terms of customer satisfaction and competitive positioning,” says Siddharth Jain, Partner, AT Kearney.
“The coronavirus lockdown has forced FMCG companies to step out of their comfort zones, as manpower shortage and shutting down of stores have brought the traditional distribution mechanism to a grinding halt,” says Amrinder Singh, Director, Bonn Group of Industries.
“As a result of lockdowns across the world, more people are exploring the e-commerce platform to meet their daily and essential needs. E-commerce firms have to look at new and innovative ways to meet the demands of the customers. There has been huge pressure on the supply chain management in this situation and it will be interesting to note how we rise up to this challenge,” says Sanjay Sethi, Co-founder, and Chief Executive Officer, ShopClues.com.
“As buying behavior evolves, a company offering multiple products might want to make fewer of the low-volume-low-profit products and focus more on popular products that satisfy evolving demands,” adds Kiran Patil, Founder and CEO, Growisto.
Impact on Retail & Supply Chain Management
India has over 15 lakh modern retail stores that generate Rs 4.74 lakh crore worth business and approximately 60 lakh people are employed at in the retail sector, which has been severely hit by the COVID-19 pandemic. According to a Retailers Association of India report, by end February 2020, business had already dropped 20-25 percent.
The terrifying part is that no one knows when trade restrictions will be lifted, when the government will allow shopping centres and stores to reopen and when normalcy would return.
Meanwhile, with SCM side of the business is currently dealing with:
Cash Flow Restrains: The cash inflow of the industry has come to a standstill, while the fixed operating costs remain intact. A similar situation was witnessed during the time of demonetization, but this situation is more critical. In the present scenario, it seems as if cash rotation would slow down for all categories barring food and retail as these will be less impacted.
Production Shutdown: COVID-19 has left retailers with limited supply as all factories are closed. The government is working on opening a few factories related to retail and other categories but matching the normal day production rate is still far from sight. Even retailers of essential items are facing losses as they are not allowed to sell non-essential items, which usually have higher margins. They can’t even deliver these products currently.
Challenges for Supply Chain Industry Amidst COVID-19
Transportation: Transportation is the backbone of the supply chain. With around 80-85 percent share in the value terms currently, the percentage of transportation will always remain high in coming years. However, the lockdown has imposed major restrictions, as a result air, rail and road services are feeling the heat in fulfilling the demand supply. A large part of Indian retail industry is still dependent on the transportation via roads and therefore, despite the measures and support from the government, the supply chain industry is feeling the pressure.
Another major fallout here is unemployment. Due to social distancing and lockdown restrictions, companies have to operate with a limited number of workers.
Manpower: With millions of migrant workers back home or under lockdown, supply chain and other retail business are struggling to deploy even 20 percent of the required labour force. For maintaining inventory in warehouses, a skilled workforce is required, which seems a distant probability in the new normal. Aside from this, factories of essential goods have been operating with restricted working hours, reduced staff, and shortage of trucks.
Hygiene: With hygiene becoming the new standard by which industries are being judged today, the country’s supply chain management needs to put in that extra effort and time in maintaining the sanitation process during transportation and delivery of products.
Safety Measures: Supply chain management is done in a closed environment involving a number of workers (both skilled and unskilled), and with social distancing the new normal, working in closed areas requires fool proof safety measures to ensure employee wellbeing.
Lack of Inventory: The sudden spread of COVID-19 caught most retailers unawares, not giving them enough time to stock up on products. With the lockdown in place, retailers are left with limited stock of products, with a lot of inventory stuck in the state specific or local warehouses. This in turn is becoming a challenge in supply chain management.
What To Do Today
A McKinsey study titled ‘Supply-chain recovery in coronavirus times—plan for now and the future’ says that in the current landscape, we see that a complete short-term response means tackling six sets of issues that require quick action across the end-to-end supply chain
– Create transparency on multi-tier supply chains, establishing a list of critical components, determining the origin of supply, and identifying alternative sources.
– Estimate available inventory along the value chain—including spare parts and after-sales stock—for use as a bridge to keep production running and enable delivery to customers.
– Assess realistic final-customer demand and respond to (or, where possible, contain) shortage-buying behavior of customers.
– Optimize production and distribution capacity to ensure employee safety, such as by supplying personal protective equipment (PPE) and engaging with communication teams to share infection-risk levels and work-from-home options. These steps will enable leaders to understand current and projected capacity levels in both workforce and materials.
– Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and being flexible on transportation mode, when required.
– Manage cash and net working capital by running stress tests to understand where supply-chain issues will start to cause a financial impact.
Aside from this, retailers must adhere to the following:
Digitization at the Ground Level: The logistics systems and warehouses involved in the supply chain in Tier I cities are technically advanced and automated. As a result, they are still functioning and are able to process demand despite working with limited restrictions. Regrettably, Tier IV, V and beyond are mostly labour intensive, requiring vast amounts of paperwork among other formalities. In the current COVID-19 pandemic, governments and businesses with strong digital infrastructure and enabling regulations such e-signature and e-transactions laws, are dealing with the supply chain disruptions much better than those without. Digitization will make the entire process very fast and organised
Prepare for the Future: A supply chain initiative needs constant upgradation. In India, the need of the hour is to implement supply chain finance programmes to support suppliers in dire financial straits and make the value chain more capital efficient. If companies begin to institute data sharing in their supply chains at the same time, they will be in a much better position to deal with future upsets.
Prioritize Products and Manage Demand Volatility: The current COVID-19 pandemic has caused disruption with various degrees of impact. Retail priorities and supply chain issues are changing quickly. It is time for companies to rapidly assess, recover, and respond quickly to numerous obstacles and challenges that still stand in the way. While the retail environment will Stabilise at some point in the future, it is difficult to predict what our ‘new normal’ might look like.
Going forward, retailers and suppliers must join hands in an effort to counter the logistical and transportation slowdown and reinvent supply chain management. They must explore newer distribution channels that is technologically more sound to counter a calamity of the scale of COVID-19. Reinventing the Indian supply chain model will be a key challenge post lockdown for the Indian Retail Industry – something which would indeed be a true game-changer.
~ With Inputs from Charu Lamba ~