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What is supply chain disruption and why is COVID-19 different?

COVID-19 (Coronavirus) is disrupting the retail and supply chain industries. Here’s how.

The COVID-19 pandemic has drastically impacted everyday life—affecting every country, business, and individual. Some retailers have closed their doors, others are struggling to keep shelves stocked, eCommerce delivery times are longer than usual, and nearly all consumer products fall into one of two categories: Essential or nonessential.

Disruptions are common in the retail and supply chain industries. From weather events to geo-political issues to evolving buying behaviors and more, disruptions happen and the frequency is increasing. However, a disruption at this scale is not common. So, what makes COVID-19 different?

In this article, we look at:

  1. The difference between typical supply chain disruptions and the unique characteristics of COVID-19 as it relates to the supply chain
  2. How COVID-19 is impacting consumer buying behaviors
  3. The backlash on the retail and supply chain industries

What is supply chain disruption?

A supply chain disruption is an event that impacts the production or distribution of goods within a supply chain. They happen all the time, and the degrees of extreme vary.

Supply chain disruptions include forecasting and allocation errors—too much or not enough inventory, unpredictable surges in demand that create bottlenecks and stock-outs, geo-political events like the trade wars, customs delays, labor shortages and strikes, mechanical issues in manufacturing plants, major weather events—the list goes on.

Here are a few recognizable supply chain disruptions from recent years:

  • Hurricanes Katrina, Harvey, Sandy, Irma, and Michael: In the last 15 years, major hurricanes have significantly impacted regions across the U.S. and Puerto Rico where damages ranged between $50B to $160B
  • 2018-2019 trade wars: U.S. and China went head-to-head on trade, which resulted in sky-high tariffs being placed on on common imports and exports
  • The Volkswagen diesel-emissions scandal: VW had 70% of the U.S. passenger-car diesel market and had to recall more than 500k cars in the U.S. and more than 10.5 million worldwide
  • Ongoing labor shortages in long-haul trucking and transportation create bottlenecks, having downstream effects as capacity constraints limit the movement of goods
  • The Tickle Me Elmo craze in 1996. After Rosie O’Donnell randomly promoted the new toy on her talk show, there was a surprise surge in demand, however, not enough units were available nor could they be produced quickly enough to meet demand—leading to one very coveted Tickle Me Elmo going for the price of $1500

No matter the scale, disruptions are disruptive. However, most supply chain disruptions are relatively singular in nature—there is a scope to each event. That is not the case for COVID-19.

COVID-19 is atypical and complicated

The common denominator of normal supply chain disruptions is that each disruption is “contained” by time and space—this component was impacted at this time. There is a cause and an effect. Tariffs, for example, are disruptive, but there’s a timeline that can be managed. Even larger, more extreme events like hurricanes are contained because they are relative to a specific region and time period. Once a storm ends, damages are assessed and recovery efforts begin.

COVID-19 is different. It isn’t contained and it’s complicated. Every region is impacted, but not in the same way; different businesses are facing different sets of challenges; there is no end date.

The effects of COVID-19 are far-reaching and they are happening in waves. According to a recent survey, 80% of businesses believe they will be impacted by COVID-19. What began in China has now spread to every country where no two regions are affected in the same way or at the same time.

With no vaccine, the most effective defense is to practice social distancing—which has fundamentally shut down travel, tourism, and consumerism. Restaurants, bars, retail stores, and even parks are closed, and it’s unclear how long this will be the case.

Consumer spending is different

There is little specificity to COVID-19. Every business, product, and activity is under scrutiny—deemed either “essential” or “nonessential”, which is also playing out through where consumers are spending money.

Essential businesses are open, but operating under very different circumstances to keep employees and customers safe. Traditional competitors like Walmart, Target, and Walgreens aren’t competing, but standing together to make sure communities have access to products and services they need. Meanwhile, retailers like Apple, Nike, Nordstrom, and others have closed their stores, moving sales online.

But because we don’t know when “society” will reopen, our buying behaviors have changed to reduce the number of grocery trips and to accommodate more time being spent at home. Right now, not all retail is equal. General merchandise retailers saw a 50% increase in online sales on March 13, while online sales for apparel and footwear dropped 37% just two days before on March 11.

In fact, a year-over-year comparison of March 2019 to March 2020 highlights how different purchasing is today that it usually is this time of year:

  • The top 100 fastest-growing categories show that shoppers are investing more in health, food, and wellness categories. In the top 10 are bread machines (+652%), weight training (+307%), and dishwashing supplies (+275%) as people adjust to life inside.
  • Last year, consumers were buying items for upcoming travel and events. March 2020 spending shows how much that has changed. Sales are down for luggage (-77%), cameras (-64%), and event and party supplies (-55%).

Consumer spending: Non-discretionary vs. discretionary purchases

The paradigm of non-discretionary and discretionary spend has been inverted. Consumer packaged goods (CPG) are non-discretionary purchases and include items like toothpaste, soap, and toilet paper. They are everyday household items that you don’t really think about unless you’re running low. In retail, the CPG category is one of the most stable product categories to plan for because the frequency of purchases is relatively predictable. It is a regimented segment and relies on just-in-time manufacturing and scheduled replenishment to keep costs down and efficiencies high.

On the other hand, discretionary purchases include clothing, shoes, electronics, and accessories. Due to changing trends and seasonality, these categories are more difficult to forecast because retailers and brands don’t want to overproduce goods, but they also don’t want to underproduce them either.

Because of COVID-19, non discretionary products are in high demand while discretionary spending is down. The uncertainty of the pandemic is causing consumers to stockpile goods like toilet paper, Clorox wipes, and hand sanitizer—all of the items that are typically purchased over time, not all at once. As a result, there is a shortage in CPG products and an excess of inventory in every other category.

According to McKinsey & Company’s bi-weekly survey on consumer sentiment, 69% of Americans are “very/extremely concerned about the uncertainty of the duration of COVID-19” and 53% are “cutting back on spending” as a result.

The survey also found that at the global-level, grocery is the only category expected to grow in the next two weeks, while the restaurant, footwear, apparel, jewelry, accessories, and furniture/appliances categories are all expected to decline between -40% and -80%. In the U.S., spending is only expected to increase for groceries (+15), household supplies (+2), and entertainment at home (+6).

New purchasing trends upend the supply chain

Shoppers don’t usually have to think twice about whether or not the everyday products they need will be available. But now, the fear of stock-outs are causing shoppers to stockpile instead.

Months-long supply chain planning, modeling, and forecasting initiatives that were relevant 6 weeks ago are no longer relevant. The incredible shifts in consumer spending that COVID-19 has caused has made most plans a moot point.

Consider the following:

  1. Toilet paper has a predictable purchasing pattern, which requires a relatively linear supply chain based on regularly scheduled order cycles. The spike in demand for toilet paper has caused most stores to run out, and given the predictable nature of the product, the supply chain was not prepared to accelerate production and distribution to meet demand.
  2. Conversely, apparel, footwear, and luxury goods have come to a screeching halt. Physical stores are still the strongest sales channel for most retailers, but with that sales channel closed, inventory isn’t moving quickly and there’s more on the way. As a result, purchase orders (POs) are being canceled and/or already-purchased inventory may never be sold at full price.

Some brands that had designed a network to support a year’s supply of product are now running through projected inventory—basically having to skip the warehouse completely and dropship directly to retail stores to keep goods in stock. Others who closed their brick-and-mortar locations have moved sales online—creating a shift in strategy, resources, and dedicated capacity—reducing operations from having to support multiple channels to just eCommerce retail.

Now, as China comes back online and goods are being shipped, a lot of retailers and brands are faced with a confluence of factors. Inventory is on its way to stores that aren’t open, the replenishment and fulfillment of essential goods are being prioritized over nonessential goods.

Supply chain disruptions: Bringing order to chaos

COVID-19 is the largest disruption we have seen in modern times, and we’re not on the other side of it yet. Every country, business, and individual is being impacted, and we’re seeing just how much our lives rely . It is showing us how drastically our lives are affected when society shuts down and the domino effect that occurs. It is also exposing to the world how essential the global supply chain is and what happens when goods can’t get to where they’re needed.

With every disruption, small and unthinkably large, it is critical to take a step and back and figure out what the priorities are. Is it employee well-being, customer satisfaction, operational support, or something else?

A lot of businesses have been or will be faced with tough decisions. In a crisis, it is likely that some sort of trade-off will be required. Having a decision-making criteria that can be consistently applied will clarify issue-by-issue decisions and provide an objective framework to prioritize and determine your next steps.

On the other side of COVID-19, there will be key takeaways because from every disruption, there is something to learn. Of those, two things are certain:

  1. The world won’t just go back to the way it was—there will be a new normal.
  2. Disruptions will continue to happen. Establishing how you deal with them will make all the difference in how successfully you fight the fire.

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