Two weeks ago, we began our journey through a report by British law firm TLT which focuses on the economic cost of the global supply chain crisis.
The first article focused on some of the permanent change that was introduced by the global supply chain crisis. We conclude the report in this article focusing on how to manage this change effectively.
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Guaranteeing supply
Retailers are building more flexibility into supplier networks.
The report points out that the majority of retailers (64%) also say that longer lead times with suppliers is one of the longer-term issues affecting supply chains. As a result, retailers are more likely to have grown (29%) than consolidated (20%) their supplier base in recent years to obtain more flexibility.
Duncan Reed, regulatory partner at TLT, says: “As well as longer lead times, we’re seeing disputes arising from suppliers reneging on contractual commitments such as pricing, and threatening to take their business elsewhere. This is a highly unusual situation, and retailers will need to carefully consider their options. For example, what are the alternatives to ending the relationship, and what are the benefits of working with suppliers they’ve known for years and developed a certain degree of trust and understanding with versus having the opportunity to negotiate new contracts with alternative suppliers that are designed with the current market context and future-gazing in mind.”
The report adds that the most popular locations for signing up new suppliers since the start of the crisis have been Asia (outside of China and India) (19% of retailers), China (15%), the UK (15%) and the rest of Europe (15%). The most popular locations for all suppliers now are Asia (outside of China and India) (76% of retailers), the UK (70%), China (67%), the rest of Europe (63%), India (54%) and the Middle East (52%). This suggests retailers are becoming less dependent on China, and sourcing closer to home – shortening supply chains, supporting the local economy and supporting the planet.
And in what could be a growing trend, a fifth (21%) of retailers are moving some of their manufacturing closer to home. Smaller proportions are planning to in-source some of their supply chain functions such as shipping/transportation (16%), warehousing (11%), distribution (11%) and sourcing raw materials (10%), but it will be interesting to see if and how this develops.
In the current economic climate, it’s important that retailers understand the vulnerabilities in their supply chain, including the financial stability of their suppliers. Promisingly, retailers appear to be working in close cooperation with their suppliers, with three quarters (73%) maintaining close links/ regular contact, 60% obtaining credit reports, 42% checking insolvency/other public registers, and 36% obtaining current financial/management information direct from the supplier.
Alastair Lomax, restructuring and insolvency partner at TLT, says: “We are seeing increasing numbers of businesses facing financial pressures resulting directly from supply chain disruption and associated cost pressures. In the worst cases, the impact has been sudden and catastrophic with a downstream domino effect of insolvency and supply disruption.”
He adds that, “Many FMCG suppliers rely on rapid throughput, run lean on stock and are funded accordingly. If delay and disruption become the norm, many will need extensive financial and operational surgery to reorient themselves. Retailers must be alive to these challenges, stick closer than ever to their key suppliers, monitor for signs of financial distress and be ready to respond quickly.”
Biting the efficiency bullet
Supply chain crisis makes robotics and automation a necessity.
The report points out that the retail and leisure sectors are continuing to face significant labour shortages after multiple lockdowns and Brexit reduced the number of candidates available and eligible to work in the UK. We have all read about the HGV shortage in late 2021, but since then, when asked where they are feeling the labour pinch the most, the majority (61%) of retailers say warehousing and distribution as opposed to shops (20%) or head office (19%).
Adding to rising supply chain costs, retailers are addressing this with higher pay (63%), sign-on/long-term incentive bonuses (56%), extra benefits (51%), training/upskilling (33%), and to a lesser extent, paid-for visas for non-UK residents (27%) and reassignments from other parts of the business (21%).
Liz Cotton, employment partner at TLT, says: “Retailers are also increasingly embracing the use of AI in recruitment and decision-making generally. While there are many benefits to this, such as reducing touchpoints and increasing efficiencies, it does raise other challenges for employers who will need to ensure that they don’t inadvertently breach human rights or fall foul of discrimination laws.”
Retailers are increasingly looking at robotics and automation to help address the staffing crisis and increased labour costs. When asked which technologies they are using or considering investing in to improve their supply chain, two thirds (60%) say robotic process automation, 59% say cloud services/ adoption, and 44% say machine learning/artificial intelligence. Dan Read says: “It’s clear from our research that there is still more for retailers to do in terms of investing in new core technology that will not only increase efficiency, but also improve accuracy and ultimately save costs. The challenge is often having the time and money to invest in new, complex technology when margins are squeezed and fixed costs are rising, however I don’t think retailers of all sizes can afford not to adopt cloud and automation technology as they would risk being left behind.”
Gousto, the British meal kit retailer, recently announced it is continuing to freeze prices – effectively reducing prices for consumers amidst the highest inflation in the UK for three decades – and also planning more automation to cut costs. According to the Financial Times, its automated factories use algorithms and machine learning to shorten delivery times and help with customisable orders. Other forecasting algorithms predict supply needs, helping to reduce food waste to 1%.
The report adds that there is also increasing demand for suitable warehousing in the UK, contributing towards an expected increase in retail warehouse rent in the coming years (0.9% between 2022 – 2026, Statista) – although developers will also be looking for more opportunities to meet that demand. Retailers predict they will need 7% more warehouse space on average over the next five years, and two fifths (39%) say there isn’t currently enough suitable warehousing available in the UK. This was caused by the supply chain crisis.
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When it comes to location, half (50%) of retailers are opting for larger, strategically-placed sites, while 13% are favouring smaller, local sites, and 37% are using a mixture of the two. Local warehousing may become more beneficial as a means of offering a cheaper place to carry stock. Perran Jervis says: “Retailers should consider how to budget for greater costs and investment in warehousing as much as they might in sales space, especially as the online retail market continues to grow and there’s greater need for closer inventory management with less product in-store.”
Shifting the narrative
Two years ago, discussions about UK retailers’ supply chains were dominated by Brexit. Today, the issue is more global – the pandemic has highlighted weaknesses in global supply and retailers are facing long-term changes that fundamentally undermine traditional ways of doing business.
The report points out that retailers can expect a great deal of scrutiny over how they respond to these issues. Their relationships with suppliers, consumers, investors, employees and the environment are fragile, requiring them to balance many, often competing ideas.
These relationships are also governed by an increasingly burdensome legal and commercial framework that requires further compliance and increased process in this respect, and can lead to significant financial and reputational damage if the retailer hasn’t acted appropriately. It’s never been more important for retailers to understand the risks they face as they adopt a transformation mindset and make some difficult but necessary decisions in order to survive.
