The Book of Revelations is silent on the matter of supply chains but it has plenty to say about pestilence. Investors and company executives, especially in the manufacturing, logistics and retailing sector are now discovering how tightly coupled those topics truly are.
In recent weeks the financial press in the US is full of stories about the deleterious impact of supply chain disruptions on the upcoming reporting season.
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Bloomberg recently reported that supply chain chaos would hurt earnings in Europe. Barrons made similar observations about the upcoming US earnings season.
And this week Adobe Analytics, which tracks retail sales of companies using its experience cloud issued a cautionary note about the impact of supply chain problems on the huge upcoming online global retail sales season. That critical pre-Xmas retail period kicks off with Singles Day in China on November 11 and ends with Cyber Monday on November 29 in the US.
Last year this festival on conspicuous consumption generated over $US125 billion in sales, and all that stock then had to be moved on roads, in planes and over the seas from seller to buyer. And now it's about to happen again. Then, Christmas.
Compared to the pre-pandemic period (Jan 2020), the prevalence of out-of-stock messages has risen a massive 172 per cent going into the holiday season. Furthermore, Adobe Analytics suggests no improvement is likely in the immediate term, and in fact, things may be about to deteriorate.
The analysis identifies apparel as the worst affected category for out-of-stock, with sporting goods, baby products, and electronics also badly hit.
In Australia, the Reserve Bank of Australia seems to have been caught off guard by the speed at which the gradual accretion of supply chain problems has morphed into an emerging crisis.
In its May 2021 Statement on Monetary Policy, it noted that very large shifts in patterns of demand had strained global supply chains and that while Australia was not immune to these, "... for the majority of firms these issues have been relatively mild and/or temporary, and have not materially affected their ability to operate.
It reported, "Only a small share of businesses have made major long-term changes to their supply arrangements to date."
Perhaps they should have.
In August when it published its most recent Statement of Monetary Policy, the RBA's analysts had still not clicked to the scale of the problem, although the central bank noted: "supply chain bottlenecks are still being worked through and shipping costs are unusually high."
Supply chains, long considered a cost centre that was best managed with brutal just-in-time efficiency are now a critical board and executive-level risk.
Company leaders and supply chain executives that Digital Nation spoke to describe a trend of cascading problems that have snowballed since the start of 2020, and which ultimately impact on the customer experience in terms of service levels and prices.
Steve Perissinotto, (pictured) director of VetShop Australia, Australia’s largest independent pet health care retailer said that despite the obvious upheavals caused by closed borders and lockdown in the early days of the pandemic, the situation has actually become worse in recent months.
“We didn't have any challenges with supply, or out of stocks and that sort of thing. We didn't really have any challenges getting [stock] into our warehouse. That's changed in the last few months particularly around out of stocks from the manufacturers.”“Up until probably the last couple of months getting stock into our warehouse was not a challenge. About 50 per cent of what we sell is manufactured internationally then brought into Australia and shipped to us."
VetShop group has seen strong sales during the pandemic, indeed, Perissinotto describes sales as phenomenal. However, the company has had to temper its marketing. “We've had to limit that growth."
“If we just advertised more, we would just sell more. But we’re a privately owned company, we're a little bit old fashioned in the sense that we say we don't want to disappoint people. So there would have absolutely been more opportunity for that growth to be even greater.”
The issues VetShop Group has encountered are not restricted to mid-tier companies but are seen across the board including in some of the biggest and best-managed supply chains in the world.
According to Gartner’s Thomas O’Connor Senior Director, Global Supply Chain Research and Advisory “We've seen over the last 18 plus months that as supply chains have really been challenged by COVID, we've seen supply chain [managers] needing to rethink how they're structured, how they're operating, is just in time, the right model for those businesses who are currently utilising it?"
That has brought the issue of resilience and agility to the fore, he says.
O'Connor, whose role involves him providing advice to Fortune 500 companies told Digital Nation Australia, “We’ve seen a number of organisations needing to rethink how they're currently structured. So for example, last year, we saw companies like Coca Cola, coming through and doing significant SKU (stock-keeping unit) reductions. That was part of how they drove the resilience of their operations. So they could continue supplying their product to their customers to their consumers, as that was desired.”
Each year Gartner identifies what it considers to be the 25 top supply chains in the world, and O’Connor tells Digital Nation the best-run supply chains share three common characteristics, starting with a focus on purpose.
“What we're really seeing is that the purpose of an organisation is just expanding beyond the idea primarily, of the concept of shareholder returns.”
Global supply chain leaders incorporate other aspects into organisational purpose including [the needs of] society, customers, employees, along with its suppliers and other network partners, he says.
“Interestingly enough, when we think about that purpose-driven piece, we see other organisations like Unilever and their Compass strategy, which is laying out a very comprehensive ESG, or environmental, social and governance plan to improve the state of the planet, support people's health and wellbeing and continue to a fairer, more socially inclusive world."
Next, he highlights the role of customer-driven transformations.
He says Nike and Walmart are examples of businesses that have invested significantly in enhanced digital experiences. “And so we're seeing those omnichannel, or as we like to refer to it unified commerce capabilities, where you're integrating online and offline, very much advancing, and that's being driven by customer need and customer want.”
“Of course, it's not just in the retail world, or the consumer world that those changes are happening. We're also seeing shifts where we see organisations starting to build in B2B digital commerce capabilities.”
That is reflected in Gartner's choice of Cisco, a technology networking giant, as having the best run global supply chain.
Finally, he said, the best-managed supply chains have recalibrated around digital-first thinking.
“When we surveyed boards of directors, nearly 70 per cent of respondents accelerated their digital roadmaps last year. And this is coming through across a range of different data points. We see companies like Nike now saying, 'actually, our business strategy is a digital-first strategy.' And of course, that ties through to the supply chain operations as well and how the supply chain is rethinking their operations.”
“We're seeing companies such as P&G and PepsiCo, building custom on-shelf availability tools internal to their organisation. We're seeing organisations like Samsung extending customer visibility beyond their large channel partners to small distributors. And of course, no surprise, we're seeing far more usage of new emerging technologies like artificial intelligence and machine learning to analyse supply constraints, balance market share, profit, and of course, customer support objectives.”
Clearly, the pandemic disruptions tested the resilience of even the best supply chains.
Nestlé is number five on Gartner top 25 list. Its Oceania head of supply chain Maria Clara Esguerra told Digital Nation, “I have to start saying that I have the most resilient team in the world. It is not only COVID.”
Esguerra then ticks off a long list of challenges her team has faced since she arrived in 2019. “We have had the bushfires, we have COVID wave one and COVID wave two. Then we have the port issue.”
Esguerra said all of these issues amplified the importance of business continuity planning.
“One of the biggest changes is [that] we were just-in-time before, we didn't have so much stock. We'd react and we [would] increase the stock.”
But, she stresses, simply increasing stock levels is not enough, it also needs to be stored and moved.
“So we have to create a lot of BCP (business continuity planning) plans. Every time that we have a COVID [case] or something like that, we say, okay, what is the BCP plan? How much stock do we need? How many locations do we need to add? How much transport do we need to add? How can factories produce [stock]?”
While digitalisation of supply chains has improved analytics and transparency, there is a limit to what it can deliver.
Esguerra says, for instance, the effectiveness of forecasting tools was impacted by the huge changes in behaviour the COVID disruption created.
“The forecasting that we thought it was going to work in COVID, forget about, it didn't work. We have automation and we use different companies to help us to do all the forecast, it didn't help.”
And even the lessons learned in the first wave of COVID didn’t automatically apply in the second wave, since consumption patterns again were different, said Esguerra.
There were many variables to consider, she suggested.
“How do people react in a lockdown? Why do they look for different kinds of products and not the other ones? What happened with the weather? All these kinds of things we need to put in the forecast. So that part is very important in the automation in the logistic process.”
“I think those are the things that we really need to work on. And we will do for next year.”
According to Richard Bray, chief operating officer of PredictHQ, a San Francisco based firm specialising in demand forecasting, "Consumer behaviour has certainly changed in the last 18 months and continues to change."
He told Digital Nation Australia that businesses leverage external data sources to map demand patterns and be able to forecast accurately.
"Predictive algorithms can’t rely solely on first-party, historical data," he said.
A decade's worth of customer journey digitalisation has also added complexity into the mix, according to Aarron Spinley, SVP at Thunderhead, which operates in the customer experience management space.
"As the front end customer experience flow has become far less linear — and the data less reliable as a consequence — many accepted demand forecasting and supply management practices have been found to be lacking in agility. This is compounded by long delivery times in some industries or geographies, cost of air freight for short term fixes, and relative proximity to distribution centres."
The problems being experienced by organisations around the world have forced leadership teams to elevate supply chain management as a business priority says Graham Conlon, VP and head of digital supply chain for SAP.
“I think the key thing about COVID is that it's just made everything so visible, it's made everybody see the disruptions.
“The key thing in any supply chain is how do you manage those disruptions. And with COVID, the disruptions are just on such a massive scale. This really shone a light on issues with resiliency in the practices, in the processes, and on some occasions in the technologies, as well."
He said, “The conversations that we're having, when we're really looking at how do we digitally transform supply chains, it's about how do you build in resilience so that you can manage risk, you can manage uncertainty, but secondly, how do you build in this agility so that you can pivot and you can really put your company's best foot forward.”
Gartner’s O’Connor echoes the need to focus on agility and resilience, and to that, he adds the issue of the surface area of a supply chain.
“How much are we actually presenting to be disrupted to the world? How many open areas do we have which can be disrupted? And so that's where we then start to see changes in terms of our risk profile and our risk strategy.”