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Five Actions Retail Supply Chains Can Take to Navigate the Coronavirus

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Five Actions Retail Supply Chains Can Take to Navigate the Coronavirus Retail Practice Five actions retail supply chains can take to navigate the coronavirus pandemic Retail supply chains are grappling with the humanitarian impact of the outbreak, as well as new operational risks. Five actions can help retailers bring goods to communities and help employees. by Manik Aryapadi, Vishwa Chandra, Ashutosh Dekhne, Kenza Haddioui, Tim Lange, and Kumar Venkataraman © Shironosov/Getty Images April 2020 As the coronavirus outbreak has spread and governments have placed on store openings and its humanitarian impact has grown, retailers have order deliveries might further influence consumer stepped up their efforts to provide consumers with behavior. In recent McKinsey surveys of consumers essential goods and to protect the health and well- in Italy, Spain, the United Kingdom, and the United being of the communities they serve. Particular States, respondents were more likely to say that challenges have arisen in global retail supply they would increase their spending on groceries chains, where the pandemic’s far-reaching effects than to decrease it during the next two weeks. For have weighed heavily on the health and well-being most discretionary consumer-spending categories, of employees and jeopardized livelihoods and including restaurants, apparel, and furnishings, economic lifelines in many communities. respondents were more likely to say they would decrease spending (Exhibit 1).1 Retailers are now taking extraordinary measures to keep goods moving to store shelves and Consumers have also said they will shift spending consumers’ doorsteps. Supply-chain leaders are among channels. In the surveys noted above, creating transparency and building rapid-response McKinsey asked consumers whether they were capabilities to mitigate the short-term fallout planning to increase or decrease their in-store and from the crisis. We focus in this article on the five online spending on various types of goods during actions retailers are taking to resolve the immediate the next two weeks. Only respondents in Italy and challenges that COVID-19 presents to supply-chain Spain said they were likely to increase their in-store workers, business partners, and operations. (In a spending on nondiscretionary goods, such as subsequent article, we will examine how supply- groceries and household supplies. Respondents chain leaders at retail companies can chart a in the United Kingdom and the United States, by path to the next normal, building resilience and contrast, were more likely to say they would increase returning the supply chain to full effectiveness while their online spending on groceries and household reimagining and reforming supply-chain operations items. And respondents in all four countries said to improve their performance.) they were likely to increase their online spending on a wider variety of items.2 Changes in consumer spending Other research underscores these early shifts. An during the outbreak analysis of retail traffic in major US metropolitan Retailers’ supply-chain difficulties have largely areas between February 19th and March 20th arisen as big shifts in consumer behavior and showed increases in traffic at grocery stores and stepped-up health restrictions have rippled back warehouse chains, while movie theaters, restaurants, through their operations. One noteworthy shift and malls remained closed. Downloads of delivery has been an abrupt swing in purchasing patterns. apps for grocery retailers increased by 100 to 200 Sales of nondiscretionary products, such as food, percent over the same two-week period. household, and personal-care products, have spiked, while sales of discretionary items, such as Stores, logistics systems, distribution facilities, and apparel and furnishings, have tailed off. supplier networks weren’t engineered for the rapid shifts in demand patterns we are seeing today. To Our consumer research indicates that these initial adjust, retailers are retooling every aspect of their shifts could persist in the very near term—though it supply chains, from procurement to customer remains to be seen how the restrictions that some service. As supply chains for nondiscretionary 1 “US consumer sentiment during the coronavirus crisis,” March 2020, McKinsey.com; “Spanish consumer sentiment during the coronavirus crisis,” March 2020, McKinsey.com; “Italian consumer sentiment during the coronavirus crisis,” March 2020, McKinsey.com; “UK consumer sentiment during the coronavirus crisis,” March 2020, McKinsey.com. 2 Ibid. 2 Five actions retail supply chains can take to navigate the coronavirus pandemic GES 2020 Five actions that retail supply chains can take to navigate the coronavirus crisis Exhibit 1 of 2 Exhibit 1 In several countries, consumer surveys show a likelihood of greater spending on groceries and less spending in discretionary categories. Net intent to change spending over the next 2 weeks, by country, by category,1 % change Italy (n = 1,003) Spain (n = 1,002) United Kingdom (n = 1,007) United States (n = 1,073) Groceries Quick-service Restaurant Footwear Apparel Jewelry Accessories Furnishings restaurant and appliances 20 20 0 0 –20 –20 –40 –40 –60 –60 –80 –80 –100 –100 1 Net intent is calculated by subtracting the percentage of respondents stating they expect to buy more from the percentage of respondents stating they expect to buy less. Source: McKinsey Marketing & Sales surveys conducted March 21–23, 2020; all data are weighted to match countries’ populations of people 18 years and older goods have ramped up activity, companies have resources—working capital, inventory, employees, had to balance the surge in demand while also transport capacity—to where they are needed most prioritizing the protection of their employees’ health (Exhibit 2). We explore these changes in detail below. and well-being across the supply chain. On the other hand, supply chains supporting discretionary goods Suppliers: Secure demand have redeployed resources to support online orders Surging demand for nondiscretionary goods has or selectively ramped down operations to deal with created network-wide stockouts for some retailers. the drop in demand. Responding to the dip in on-shelf availability, retailers are working closely with companies across their supplier bases, including consumer- How retail supply chains are adapting: packaged-goods (CPG) makers, distributors, and Five priority areas co-manufacturers. For the most important product The pandemic has forced retail executives to categories, category captains are holding daily mount urgent efforts to adapt their supply chains, meetings with strategic suppliers to work through whether by revising their purchase orders and the options for securing an adequate supply of merchandising plans or by reallocating all kinds of essential high-demand items. Five actions retail supply chains can take to navigate the coronavirus pandemic 3 GES 2020 Five actions that retail supply chains can take to navigate the coronavirus crisis Exhibit 2 of 2 Exhibit 2 Immediate action across the supply chain can help retailers meet consumer demand during the COVID-19 pandemic. Retail-supply-chain changes Nondiscretionary categories Discretionary categories Suppliers Merchandising Distribution Logistics Fulllment Establish daily Revise buy plans and Retrain employees Allocate more Relax same-day/ meetings with reallocate sta and redeploy them transport capacity to next-day delivery strategic suppliers toward high-demad to distribution high-demand items requirements Reduce product categories centers in high- Have suppliers Optimize routing variety Override algorithms demand areas deliver directly to and accommodate Reduce on-time, to redirect inventory Raise wages stores more delivery slots in-full requirements, to high-density areas and make Stage products at Enforce order as well as payment Dial down near- temporary hires strategic hub stores maximums terms for key term buy plans to Maintain good to feed smaller stores Expand ful llment suppliers preserve cash workplace hygiene Explore alternative and return options Mitigate risk for Anticipate future Cross-train store and supplemental to give customers existing orders, in increases in sales and back-oce delivery options exibility collaboration with and adjust buy plans personnel to assist Oer transportation suppliers accordingly with e-commerce capacity if private eet is available to support movement of critical goods The first and foremost priority for retailers operating Declining sales of nondiscretionary goods, on across food, drug, and mass (FDM) categories is the other hand, have put pressure on the cash to secure a fast and reliable supply. Retailers are flows of retailers that sell or specialize in these taking several steps to do so. One is simplifying items. To conserve cash, these retailers can their SKU profiles to reduce variety and boost remove incentives for on-time deliveries, suspend quantities, which helps suppliers to accelerate the credit extensions, and do more business with processing of orders. In addition, several retailers suppliers that have relatively healthy cash reserves. are easing payment terms, widening delivery- Some retailers are counseling their suppliers to appointment windows, and relaxing on-time, improve their management of inventory (including in-full (OTIF) requirements. commodity products), advising suppliers not to buy raw materials, so they can avoid deepening A leading mass retailer is pursuing all these their cash deficits. Retailers can also raise cash by measures with a special
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