Pitcher Partners partner Mark Harrison discusses how retailers can work to 'lockdown-proof' supply and distribution channels.
It’s been 18 months since the first news of COVID in China sent shudders through world economies, and the reaction of some Australian businesses still ranges from hopeful to head in the sand.
For businesses based around the sale of goods, the fragility of retail supply and distribution channels has been laid bare.
They are prone to interruption not only from lockdowns or restrictions on movement, but growing international tensions, the cancellation of regular flights, and the situation on the ground in a dozen or more countries that provide the bulk of our supplies.
And as the latest lockdown in Victoria shows, despite the sluggish vaccine rollout and an intermittent return to business as usual, this pandemic won’t be over any time soon.
Uncertainty lingering over supply chain disruption remains a factor for more than one in five businesses when assessing future capital expenditure plans, and it is an issue that is top of mind when we speak to retail clients about their confidence going forward.
As every hotel quarantine leak and lockdown proves, businesses have no control over the events happening around them, and when a change comes, it will come with little or no notice.
Unlike previous months, there’s also no JobKeeper to fall back on for affected businesses and little financial support on offer from the Victorian Government, relative to the revenue lost and the costs that must be carried.
All retailers can do is plot a defence that will offer some protection if problems arise from their supply and distribution.
Rethink delivery time frames
India’s terrible COVID-19 suffering in recent months and the ongoing tensions with China remain a threat to the supply network of raw products and manufacturing that many Australian businesses rely on.
A shorter lead-in time for products, particularly those that carry seasonal stock such as fashion, needs to be factored into plans and retailers should be thinking about contingencies to deal with the impact of stock shortages.
Australian retailers also need an eye on what is happening offshore in end markets.
The US is seeing the same massive retail rebound Australia experienced in late 2020 — but on a much, much bigger scale.
The massive demand for supply there, as well as in a recovering Europe, will also make it harder for Australia’s retailers to compete for supply.
A further looming challenge lies in the cost of bringing in raw materials or finished goods.
Port congestion, a global demand for shipping, and even the large vessel that got stuck in the Suez have combined to push up the price of maritime freight — doubling or tripling the cost of transporting a container on many routes.
There is also an international shortage of shipping containers, which is leading to delays and adding to the cost.
Inevitably, this will raise the cost of products at the local level, particularly for goods that must be shipped to meet seasonal demand or tight customer timeframes.
Build contingency plans before you need them
As potential consequences increase in severity, so does the importance of an effective risk management process.
Business leaders who feel their company is exposed on supply must start by reinforcing relationships with existing partners, while mapping where risks lie.
Explore different channels for shipping materials and products, as well as backup or alternate suppliers, and ensure communication channels are healthy.
Use them to assess potential looming issues.
Are you moving into seasonal weather that could knock out roads or damage plants where products are manufactured?
How likely is another COVID-19 breakout that will hamper your distribution networks?
Lay down a plan to cover different contingencies and outline the stakeholders you will need to alert.
If supply issues emerge, retailers cannot keep issues to themselves, or they risk destroying trust.
Keep existing and prospective customers informed about products and stock movements.
It is that engagement, whether through social media, email or other channels, that ensures the presence of your brand remains front of mind.
The time to build contingencies is while business is healthy. When problems emerge, it’s too late to start reinforcing relationships or building new plans.
Look more broadly, and more locally
As the first waves of the pandemic swamped us more than a year ago, the disruption dished up a crash course for retailers about the importance of diversifying their supply chains.
The lesson was that retail businesses must continually examine and reassess their networks and seek to remain nimble.
The reality is, for those who produce goods such as clothing, nowhere can do it as cheaply as China and India.
However, part of the risk assessment is weighing up other areas that might offset higher production costs – how does the higher costs of production in another jurisdiction, such as Australia, sit against the threat from shipping disruption or lockdowns closing factories overseas?
How will freight costs change the calculation?
The cost of textile and clothing production, for example, is high in Australia compared to China and India, but the price of raw materials such as wool and cotton are well off their peaks reached the last 12 years.
Turnaround times may be faster than overseas and smaller batch production may allow for at least partial local production , which may offset higher costs.
Take the opportunity to reassess the landscape.
If your target market is local, there is also a powerful marketing message to be drawn from using Australian products and manufacturing.
Data from Roy Morgan shows 93% of Australians are more likely to buy products made in Australia.
If Australia doesn’t work out, Vietnam, Bangladesh and Latin America are important to explore, along with eastern Europe and the Middle East.
But these manufacturing scenarios will have an impact on a business model and if the additional costs cannot be absorbed, product pricing must change and that affects competitiveness.
The worst of the COVID crisis may be over but the pandemic has morphed into a supply chain challenge that will be with us for years to come.
For retailers, the lesson is that risk can't be eliminated but repeatedly assessing and testing the robustness of your channels is the only way to stay prepared for the worst.