In the age of coronavirus, Technology is playing a big role in boosting resilience but it’s also meeting its match (and no, it’s not just about toilet paper)
We’ve all now
witnessed firsthand what can happen when a basic, bulky household staple
suddenly sees wildly increased demand (for reasons both real and imagined).
Shoppers have snapped up rolls of Charmin and Cottonelle every time they are
restocked; while rumors of continued shortages and images of stockpiling lead
to ever-more panic-induced buying.
However, the
Toilet Paper Problem, experts say, is only the most notable and visible example
of the basic supply chain challenges retailers have already faced in the era of
the COVID-19 crisis. In fact, much of retail’s coronavirus-related challenges
have to do with supply chain issues, according to a recent survey by Digital
Commerce 360.
“This is that
black swan event that a lot of retail supply chains couldn’t possibly plan
for,” says Bob Ferrari, managing director, the Ferrari Consulting and Research
Corp. “Demand for some products has been as much as three, six or 12 months of
normal supply, evaporating in a matter of days.”
Typically,
after the “pantry loading” that occurs, say, when a product goes on sale,
shoppers don’t buy that product again for a while. However, in today’s era of
prolonged confinement, the purchases continue out of fear of shortages and also
because household consumption does actually go up, says Lana Klein, partner and
strategic analytics practice lead at Fractal, which offers AI-driven analytics
to retail and CPG companies. “It’s extraordinary, with kids at home and people
eating more, how overall consumption of certain products is increasing,” she
says.
On the supply
side, there is also the “bullwhip effect,” adds Ferrari. That is, big swings in
consumer demand reverberate up the supply chain, leading retailers,
distributors, wholesalers and manufacturers to order more goods, causing a
domino effect that leads to shortages or inefficiencies.
“It’s a
complex challenge that companies are facing now,” says Kevin Sterneckert, chief
marketing officer for Synchrony AI. “Most of today’s forecasting supply and
demand systems are built around triggers that help understand consumer
behaviors and provide insight into what the likely demand will be, as well as
figuring out how to meet the optimal result given the supply.” Now, however,
there is a huge demand in a variety of categories, with resulting real
struggles to meet those demands.
Historically,
Thanksgiving and Christmas have always been modeled as the ultimate demand
scenarios, says Siva Venkataramani, AVP at consulting firm Cognizant, who
specializes in retail and CPG supply chain issues. “This moment is blowing all
of that apart,” he says, though it does create a new data point that can be
used in the future.
What technology can do for retailers now -- and where it hits limits
For now,
retailers selling the most in-demand products will have to accept that their
models may be wildly inaccurate right now and outlier detection technologies
may not pick up the necessary signals. “I think down the line technology will
definitely help more retailers, but right now if you had your price sensitivity
model forecasts based on current promotions, that goes out the window,” says
Klein. “Retailers will need to manually intervene unless they have those
sophisticated AI-based systems.”
If possible,
retailers should be investing in new software today for tomorrow, says
Steneckert, to make sure they start to understand the real demand for the items
that appear to have the largest increases in sales. “There is a list of items
in a typical grocer that have had the highest increases in sales,” he says.
“Those items need special care and feeding.”
Amazon, for
example, is ramping up to meet its increased demand, hiring 100,000 new
workers. “That’s because they have AI-based systems that understand what’s
happening,” he explains. “They also changed delivery times on items so they can
adjust the supply chain to focus on items of immediate need rather than those
that are secondary. That’s the kind of intelligent thing you’d expect from an
AI-based set of retail capabilities.”
Yet, there is
no doubt that even the retailers with the best technology are facing stiff
supply chain challenges, says Ferrari, who points out that there is only so
much product that can be shipped and manufactured in this time of unprecedented
demand. Where the technology will help going forward, he explains, is offering
early warnings and boosted visibility when subsequent disruptions occur.
“There will
inevitably be new use cases from what has happened with COVID-19, and the
incorporation of machine learning technology in supply chain planning,” he
says. “We’ll see some of that start to play out when all the dust settles and
companies start to talk about where it helped them.”
There are
already things to learn from data coming out of China, he adds, such as how
companies including Alibaba have used supply chain technology capabilities,
including sensors that track shipments and truck movements, to respond to
conditions where everything was locked down. “They could not get deliveries and
trucks to where they were needed in the Hubei province,” he says. “They got
around those challenges and technology played a role.”
In the
immediate term, retailers are scrambling to keep shelves stocked. “Analytics
won’t help you right now, there is no time,” says Kleine. “You have to focus on
the products that are really flying off the shelf. You may have 200 SKUs but
five of those products are in high demand. You may have to bypass distribution
centers and have suppliers go straight to the store.”
Back to the
Toilet Paper Problem: If demand is twice the manufacturing capacity, retailers
may have trouble even finding new sources of supply. “I’m not sure if that’s
feasible, even if I go overseas,” says Venkataramani. “Will I really airlift toilet
paper? And even if you go all the way back to pulp, how much can they support?
Companies will have to do their best with the card they’ve been dealt.”
In the
future, companies will take lessons they learned from the effects of the
pandemic on the supply chain and learn to model similar scenarios supported bt
using advanced technologies, says Venkataramani. “As sophisticated a country as
we are, the first time dealing with this kind of planning is going to be a
monumental challenge.” he says. “At the end of the day, everyone is still
learning.”
Large retailers have shored up supply chain technology
Large
retailers have invested in shoring up their supply chains with modern
technology in recent years, including cloud-based omnichannel platforms,
AI-driven analytics and IoT sensors that reduce forecasting errors; provide
real-time insights into machine functioning; track assets all along the supply
chain; and achieve order accuracy.
Adoption went
mainstream from 2012-2014 in areas such as inventory management, demand
planning, supplier management/sourcing and sales and distribution, in response
to macro trends including technically-savvy and convenience-seeking consumers
with increased demands of the retail shopping experience. Same-day delivery,
BOPIS (buy online, pick up in store) and other capabilities have become table
stakes for most retailers.
“A lot of the
big box retailers are well-prepared technology-wise, particularly Walmart,
Target and digital-born Amazon,” says Venkataramani. “From an operational
efficiency standpoint, most of these companies are pretty ready.”
Companies
that have already been on the journey of a digital transformation do have a
distinct advantage right now, agrees Sterneckert, though he adds that on a
digital maturity scale of 1-5, most retailers fall somewhere in the middle.
“Those farther along have a leg up because they can begin to understand their
inventory position and supply and demand at every point, with near real-time
updates,” he says. AI-based systems, he explains, allow companies to tag
special high-demand events so when the event ends it returns to a normal model
so that there isn’t an oversupply of the product later on.
Those
retailers that have the digital technology to support flexible fulfillment
options, such as ship-to-store, order pickup and ship-from-store, will also be
ahead of the game, says Carlos Castelán, managing director of retail consulting
firm The Navio Group. “Maybe if you have some inventory in stores in one part
of the country and demand coming from another, retailers can ship to those
customers and still sell the product at full price; they don’t have to discount
and take a hit to their margin,” he says.
One problem
now, though, is that modern supply chain management, and the technology that
supports it, has primarily been focused on “just-in-time” and lean production,
producing and delivering finished goods 'just in time' to be sold. “Those firms
that were the most efficient, had the lowest inventories and the most
consolidated vendors are being hurt the most,” says Klein.
In addition,
while advanced, multi-tier inventory management systems offer increased visibility
up and down the supply chain, most companies still have disconnects and do not
have end-to-end demand-to-supply visibility, from the shelf all the way to
production.
They may have
good visibility into their Tier 1, or primary product suppliers, but remain
blinded by the lower tiers — the components that make up the product, says
Ferrari.
Take, for
example, a popular brand of hand sanitizer, which includes the actual product,
the packaging in glass bottles or dispensers, and the FDA-required aluminum cap
that seals the bottle. According to Ferrari, while the brand recently described
going 24x7 around the clock to make up the difference in manufacturing due to
extraordinary demand, they ran out of aluminum tops, which stopped them in
their tracks. “They had to switch to the aerosol version that did not need the
seal, but had to scramble for a supplier,” he says.
Also, most regional and mom-and-pop retailers, which typically have low margins, do not have the money to invest in today’s advanced cloud-based digital technologies that solve many supply chain issues. “Large CPG brands may have more leeway, so companies such as Procter & Gamble and Nestle are getting there, while high-margin businesses such as equipment manufacturers have more to invest,” says Ferrari. “When smaller retailers run out of stock, they rely on all their suppliers to have those capabilities.”
source: idginsiderpro
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