Retail Operations Threatened By Supply Chain Disruptions

Disruptions have impacted many aspects of the supply chain. This has impeded the ability for shippers to rely on consistency in their logistics processes, and for retail to have an accurate inventory forecast.

What this blog is about:

• The effects of disruption across multiple parts of the supply chain

• Inventory planning difficulties in different areas of the market

• Solutions taken by shippers to meet OTIF expectations

• Price increases leading to demand equilibrium

Today, disruptions are ubiquitous across the entire length of supply chains, forcing stakeholders to think and act proactively to fireproof their operations.

For supply chains to function effectively, it is critical to ensure the collective health of the logistics operations that transpire within them, right from the production center to last-mile delivery. It also means that disruptions at a single supply chain node can have a butterfly effect on all activities downstream. Today, disruptions are ubiquitous across the entire length of supply chains, forcing stakeholders to think and act proactively to fireproof their operations.

Vendors that supply to big-box retailers have found the environment challenging to operate in, especially with the unique constraints of delivering to physical retail. Big-box retailers expect and maintain strict standards with their suppliers, including expectations on on-time and in full (OTIF) scores. OTIF is when a shipment reaches its destination on schedule and in the exact quantity asked for by the retailer.

While movement from the distribution center to the retail store is usually via a dedicated fleet, this last-mile movement is consistent. However, everything upstream of this movement—freight movement from the point of production to the distribution center—has experienced severe disruption. The issue is widespread across all modalities, with maritime networks being one of the worst-hit in the pandemic-fueled crisis. Trans-pacific trade lanes between China and North America have seen freight rates double in the last year.

Drayage and intermodal operations on the West Coast have been severely hit as capacity continues to elude shippers. Truckload volume to capacity ratio has reached historical highs, with the outbound market from Southern California recording 30 truckloads for every one truckload capacity available. There is added pressure on retailers to fight for the critically less capacity available, as empty shelves in a store push off consumers from ever stepping foot in that retail space.

Inventory Planning Chaos For Retail Due To Supply Chain Inconsistencies

Shippers are becoming cautious and are likely to order a lot more inventory than they would have liked—thanks to the uncertainty with freight lead times.

Traditionally, shippers have a reasonably consistent and planned repetitive supply chain, complete with a set of upper and lower control limits for their inventory levels. But with the current dilemma, shippers are becoming cautious and are likely to order a lot more inventory than they would have liked—thanks to the uncertainty with freight lead times. This has led to an environment where volumes are going up faster than usual, which when set against strained available capacity, creates a perfect storm.

Supply chains in the auto industry have engineered a logistics network that is precise and consistent year over year. Unlike other markets, the auto industry can meticulously plan out their annual requirements well in advance based on the number of vehicles they plan to push through their production line in a given time frame. Nonetheless, auto supply chains have been badly hit this year due to a semiconductor chip crisis that forced OEMs to shut production for several weeks in the first half of 2021.

Inventory planning is much harder in the retail industry, as consumer demand is clearly more volatile.

Inventory planning is much harder in the retail industry as consumer demand is clearly more volatile. While demand can be reasonably forecasted based on historical trends, they are never as precise as auto supply chains. Shippers in the retail business are holding the belief that static load planning tools cannot help build resilience against volatility.

Dynamic load planning tools look to understand freight movement not at the shipment level but rather at the order level—going one level upstream for improved planning. With visibility at the order level, loads across all individual (and smaller) purchase orders can be consolidated and moved over fewer trucks, thereby saving money for the shipper.

Increasing Cost To Serve Pushes Shippers To The Corner

The tight capacity market has resulted in a critical shortage of truckload capacity, pushing shippers to split their loads and move them via LTL. The LTL market also witnesses a crunch from the e-commerce and small parcel segment that traditionally move through this mode. This, combined with the volume overflow from other modalities, has made the LTL segment difficult to operate in, mirroring the prevailing situation throughout the industry.

In essence, the steadily increasing freight prices and the crippling shortage in freight and warehousing capacity have effectively pushed the cost to serve to soar, irrespective of the market. For instance, consider the boat industry. While demand for fiberglass boats has been high, boat manufacturers lacked an essential ingredient—resin. This meant that boat production numbers fell, even as demand skyrocketed post-pandemic, causing a massive price increase.

Initially, shippers looked to absorb the increased costs to cushion the blow on the consumers and not adversely impact their pre-existing arrangements with big-box retailers. However, this cushioning cannot continue forever as consistently high prices will force shippers to pass on costs—at least partially—to their customer base. This will inevitably result in demand falling, bringing back the balance that has been lost today. It makes sense for shippers to expand their inventories, and take advantage when they come across available reserves, as consumer demand does not indicate relenting any time soon.