Experts offer tips for how retailers and their fulfillment partners can cope.
If you thought last year's supply chain woes during the pandemic have been resolved, think again: Analysts and industry experts say suppliers and retailers are already dealing with delayed cargo and skyrocketing freight prices, which will cause headaches during the holiday season.
Retailers made temporary changes to quickly move their businesses online at the start of the COVID-19 pandemic, and people adapted. While we can expect to see e-commerce increase as the holiday season approaches, retailers and suppliers haven't fully addressed the fact that online shopping is becoming a more permanent model, according to Alla Valente, a senior analyst at Forrester.
Couple that with chip shortages, uncertain weather conditions and more expensive transportation costs and that has a "cascading effect" on product shortages and longer lead times. This is certain to cause continued supply chain headaches, experts say.
"All of those changes will impact supply chains from many different directions—the speed of transport, raw materials, availability and manufacturing,'' Valente said.
This jives with a recent study by ACG Global, a network of 90,000 midcap corporate executives, which found that only 18% of companies have adopted technology platforms to solve their supply challenges since the pandemic began.
ACG's survey also found that 41% of respondents faced supply chain challenges over the past 18 months including delayed or canceled shipments of inventory or raw materials (27%), insufficient technology to capture or analyze data (6%), a lack of internal supply chain management expertise (5%) and high transportation costs (4%).
"In a normal time, retailers face tradeoffs [in] affordability, variety and spontaneity," observed Tinglong Dai, a business professor at Johns Hopkins University. "In other words, to do well on one thing, they have to sacrifice at least one of these other two. This holiday season, however, many retailers won't face these tradeoffs because … discounts will be difficult to offer."
Consumers will be forced to settle with what's available instead of what they want, Dai said. "Widespread delays in delivery and shortages will be expected."
It behooves retailers and their suppliers to get their ducks in a row. Deloitte is forecasting e-commerce sales will grow by 11% to 15%, year over year between November and January 2022. E-commerce holiday sales are expected to reach between $210 billion and $218 billion this holiday season, compared to $189 billion last season, according to the firm.
New challenges for retailers this holiday season
When it comes to outbound distribution to customers, retailers will be faced with inadequate capability, since most have separate channels for store fulfillment and e-commerce fulfillment, with the latter growing in demand significantly over the last year and a half, said Somdutta Singh, CEO and founder of Assiduus Global, a cross-border, multiplatform e-commerce supply chain and distribution company.
"Fulfilling e-commerce orders can get very expensive, particularly when a retailer has set aside funds for labor and capacity to take account of a lower volume than what is seen through the year,'' Singh said. "In the process, what gets strained is the distribution center handling, individual order picking and packing for parcel shipment and capacity of parcel shippers."
Many retailers have contracts with third-party providers for warehousing and delivering orders to stores and e-commerce customers, he noted. "Bottlenecks start arising when more volume goes through parcel shipping, parcel processing and delivery. Shipping to customers takes longer and assessing arrival dates gets hard."
Another typical challenge retailers face is a spike in returns after the holidays. Online shopping has a return-to-purchase ratio that's higher than average, Singh said.
"Retailers need to consider the probability for a spike in returns prior to the holiday and will have to strategize on how to get those returns back into the available stock" so that items can be purchased by other customers, he said. This process becomes very costly for retailers.
"This year, like last year, there will be the added hindrance of not being able to view and compare items in-store and thus, the proportion of returns will likely be higher. Retailers often [use] services from third-party providers to manage returns of digitally purchased products,'' Singh said. "Regrettably, it takes time for that product to return to stock and become available for the next person to purchase and some product never returns to full-price stock."
Another challenge is swiftly altering shopper preferences. For example, after the pandemic began in March 2020, items like toilet paper and hand sanitizers sold like hotcakes, while it was difficult to purchase at-home entertainment products and fitness equipment, Singh said.
"This year as well, we'll see a continual spotlight on these products as holiday gifts as more people spend time at home,'' he said. Yet, many retailers are still lagging behind in fulfilling their stocks of these items because this product mix is something that they generally do not anticipate for a typical holiday season, he said.
"Retailers will continue to have scarcity of in-demand products and will be in excess of products that were pre-2020 predicted to be big hits."
Supply chains have become so interconnected and efficient they have been able to save costs and enable suppliers to increase their fees, Valente said. "The problem is that only works if all the factors in the world--the market, our businesses, country, ecosystem--remain static, and that's not the case,'' she said.
Dai believes most suppliers have learned from the painful peak months of the pandemic. He agrees with Valente that suppliers' operations "have been remarkably resilient" and that they have adapted their supply chain processes, such as a new focus on safety, stock and redundancy throughout the pandemic.
The issue he sees is that the global supply chain network hasn't adapted much. "It is simply incapable of supporting the changes in specific operations and processes,'' Dai said. "Individual players have changed but the network that connects them hasn't."
Further, the pandemic's length is also hampering the ability for supply chain efficiencies to get back on track. "No amount of learning and adaptation is enough for a pandemic that turns out to have so many unexpected turns,'' Dai said. "The pandemic is longer-lasting than what most people had expected and continues to spread around the globe like wildfires."
Valente said supply chains are designed for efficiency—not agility, "and when you have an unexpected event you need the agility." They are not capable of pivoting and doing things differently, she added.
How retailers should respond
As retailers plan their holiday season, they need to start thinking about flexibility since there will likely be continued "unplanned disruptions throughout the rest of the year,'' Valente said. That means having a backup plan if they can't get items they want, she said.
Retailers should also place orders much earlier to make sure they have the right products in stock for the holiday season, Valente said. Echoing Singh, she said the risk of doing that, however, means they might misjudge what is trending, she added.
"Retailers will have to rely on their technology and the ability to predict, plan and optimize and [they] will also have to factor in the dynamics" of what the supply chain looks like today, she said. For consumers who are used to getting something off the shelf of a bricks-and-mortar store, the new normal is having to wait for months for items.
"From a brand perspective [retailers are] going to have to manage risk in their supply chains better and the visibility into the risk that affects all their supply chains better and use that information to better plan, predict, allocate and improve that experience,'' Valente said.
A longer-term strategy is to incorporate risk management into their supply chain, she said. It's not enough for them to just manage the risk inside their supply chains today related to not being able to get the best price or not planning or ordering efficiently.
"I'm also talking about the risks that come from their ecosystem of suppliers and making sure those suppliers have business continuity and backup plans,'' Valente said. Larger suppliers need to ensure they are working with their suppliers, especially those struggling financially to make sure there are no bankruptcies, she said.
"It's about managing risks you can't control,'' such as geopolitical fluctuations, climate risks, economic uncertainty and changing customer preferences, Valente said.
"What happens when you have consumers buying based on their values and things that are sustainably sourced?" she said. "If you're not keeping an eye on how those trends unfold you'll find yourself stuck with the wrong products and inventory and products that don't appeal to your customers in the way they once did."
In a time of high-demand variability, if a retailer cannot increase inventory, the best way to cope would be to smooth customer demand, Dai said. "In fact, we have already seen this trend: 'Black Friday' is no longer a thing and retailers now operate under a much longer holiday shopping season, knowing that people do their holiday shopping at very different times and over a much wider period of time."
Retailers should also manage customer expectations—not lower them, Dai said. "The key is to provide operational transparency so that customers' expectations are just about right and match retailers' strategic objectives."
Singh offers some other tips for retailers:
Think and strategize about how to stick through and survive the pandemic rather than generate revenue. Think more in terms of crisis management and business continuity.
Tap more into digital's potential.
Embrace a working model that is agile and accommodating.
Utilize omnichannel marketing that is inventive and responsive.
Overhaul physical store experiences completely.
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