Effectively Managing Margins and Inventory Amidst Supply Chain Challenges

·4 min read

A recent Accenture survey of 120 retail executives in the U.S. found that almost all (99 percent) said they have done something differently to ensure the supply of stock, while more than half (52 percent) said they’ve taken extraordinary steps to do so.

Just as businesses are hoping to recover from the losses of pandemic-related shutdowns since 2020, another study shows 88 percent of C-suite executives believe that the expected outcome from import supply chain disruption will be continued price increases, causing consumers to reduce spending. Further, one-third (33 percent) of executives believe the supply chain crisis could last for as long as three years.

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Antony Karabus - Credit: Courtesy Image.
Antony Karabus - Credit: Courtesy Image.

Courtesy Image.

What Does This Mean for Retailers?

Retailers are experiencing significant receipt delays in import orders due to a combination of the delayed and slow restart of factories following the pandemic shutdowns, a significant increase in transit times from Asia, together with labor shortages in the trucking and distribution sectors. Lastly but not least, the spikes in consumer demand have caused significant out of stocks at retail. These factors have made demand forecasting much more complex for retailers and have resulted in lost sales, especially on high-velocity items where retailers are most dependent on on-time delivery.

The increased shipping costs and other inflationary pressures imposed by product suppliers (due to their own input costs rising) has resulted in non-trivial increases in retailers’ product costs (negatively impacting product margins), much of which cannot be passed onto consumers due to increased competition and price transparency.

Given the increased complexities, operating expenses and other investments needed during this time of significant transformation, these supply chain challenges could not have come at a worse time for retailers.

But all hope is not lost.

Farla Efros - Credit: Courtesy Image.
Farla Efros - Credit: Courtesy Image.

Courtesy Image.

Four Recommended Actions for Retailers to Take in the Near-term

Based on our experiences working with many retailers during this uncertain business and consumer landscape, we recommend taking several key actions to mitigate the impact on retailers’ businesses and profitability:

  • Address urgent out-of-stock issues. Start by determining the root cause of each out-of-stock issue. Is it due to supply constraints or is there another cause? Then take swift action to prioritize out-of-stock items by relative velocity and by relative vendor importance. Lastly, initiate joint business planning strategies and action plans with key vendors. Report weekly to reduce impacts and, if necessary, build contingency plans.

  • Increase end-to-end visibility. Develop cross-functional accountabilities and visibility across the extended value chain — and between supply chain, merchandising and inventory managers — to ensure all functional areas are aligned for the overall company, rather than each area focusing on optimizing its own area. Then, put the right performance metrics in place to effectively track company performance.

  • Strengthen demand forecasting capabilities. Implement effective organizational roles, tools, processes across the product life cycle, both for year-round and seasonal products, to better understand and meet the peaks and valleys of consumer demand. Retailers can use advanced, predictive analytics to better forecast demand, accounting for changing customer behaviors and market dynamics all the way down to the local store and market level. A step-change is to proactively use analytics in a predictive way to identify and address issues before they become problems.

  • Shift to local omnichannel fulfillment and consider moving the supply chain. It’s increasingly difficult to accurately forecast consumer demand beyond a few months, let alone a year in advance — which is the typical lead time required to secure factory space and shipping from overseas. The way forward requires flexibility and scalability at the local level. More and more retailers are considering domestic production and moving key items to nearer, lower-cost locations to reduce risk and the need for forecasting too far in advance.

Looking Ahead

More than ever, retailers are facing new complexities that make it challenging to know where to place products and how best to get them to customers. The winners in the future will be those that act decisively now to reduce risk with the right strategy, data and capabilities to effectively manage inventory availability and margins — even at a time of significant and ongoing supply chain disruption.

Antony Karabus and Farla Efros, managing directors, HRC Retail Advisory, part of Accenture. HRC Retail Advisory was acquired by Accenture in September 2021 and is now part of Accenture’s North American Retail Strategy Team.

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