Post-Covid Prediction 3: The resilient supply chain - Lean, diversified and redundant

June 1, 2020

Toolio’s third prediction about the retail landscape post Covid-19 looks at the redesign of global supply chains to optimize for resilience instead of cost savings. You can see the rest of our post-Covid predictions here.

It all started with a supply shock. As China delayed the opening of factories and ports to combat the spread of coronavirus after the Lunar New Year, the world’s supply chains came to a grinding halt. Retailers scrambled to find alternative production hubs to maintain their operations. As the virus became a pandemic and the rest of the world was put on a lock down, the attention naturally shifted to store closures and the resulting shock in consumer demand. In the near future, retailer’s main priority will be navigating store openings and anticipating customers’ appetite to spend again. However, the learnings from the Covid induced supply shock will not be forgotten.

The pandemic laid bare the fragility of global supply chains. After the pandemic, supply chains will not only be optimized for cost, but also stability, flexibility and speed. Retailers will prioritize having a diversified production network, reduced inventory levels and more redundant fulfillment mechanisms.

Resilience through diversification

Fashion supply chains have been evolving since the start of the US - China trade war in 2018. At the time, which feels like a lifetime ago, retailers responded to the almost daily introduction of new tariffs by “moving some manufacturing to other countries, including Taiwan and Vietnam.” Covid-19 shifted the conversation from “where other than China” to a more fundamental question on how to structure supply chains. In the new world, manufacturing diversification will become a strategic priority. Relying on a single production facility or geography, whether it be it at home or abroad, will be a significant liability even if that setup is the most cost effective. 

As Covid-19 rolled through regions causing supply issues, companies with a diversified manufacturing base like Vibram were able to leverage factories in Europe, North America and Asia to meet global demand for their products. Others will set up similar operations, with a diverse set of offshore operations supplemented with nearshore manufacturing. This will also better match the needs of the new fashion assortments; a strong foundation of key items complemented with frequent product launches. Offshore, with longer lead times, will be primarily dedicated to key items that have predictable demand, and the nearshore operations, which have increased flexibility and faster turnaround times, will support seasonal product launches that are harder to plan for.

Diversity will bring flexibility

Facing unpredictable levels of demand, retailers will also strive to reduce risk by minimizing inventory levels. Nearshore operations will play a critical role here. New manufacturing hubs located closer to customers will have shorter lead times and enable brands to launch new  products with less inventory and adjust production based on sales signals. This method of just-in-time manufacturing is nothing new and has been perfected by fast fashion retailers like Inditex (Zara) over the last decades. However, similarly to how it has accelerated other normally slow-moving retail trends, Covid-19 will quickly necessitate the adoption of lean manufacturing by retailers, large and small.

Redundant and strategically located fulfillment centers

Manufacturing will not be the only segment of the supply chain that will require change as fulfillment was also severely impacted by Covid-19. While most distribution centers are now operating, albeit under increased safety regulations, brands such as Net-a-Porter and Reformation had to halt shipping in March. As e-commerce is quickly becoming the most important sales channel for most retailers, many will need to make major changes to their fulfillment operations in order to safeguard against potential disruptions in the future.

Foremost, we expect a shift from locating fulfillment centers within major markets to surrounding states. During the Covid-19 lockdown, having fulfillment centers in California and New York went from being a strategic advantage to a disastrous bottleneck. Brands will move fulfillment centers to states close to but outside of large population clusters. Also, having a single fulfillment center will be perceived as an unacceptable single point of failure. Brands will also need to diversify their fulfillment operations with having multiple fulfillment centers, each at a location with a different risk profile.

All of these changes will bring resilience to supply chains, but they will also make retail planning more complex. When doing assortment and production planning, planners will have to scrutinize exposure to individual suppliers or manufacturing regions and highlight concentration risks. Reduced inventory levels for key items will require more frequent and data-driven replenishments. Finally, merchandise and allocation planning will become more involved as the number of manufacturing locations and fulfillment centers increases and lead times become more varied.

Takeaway

Managing these complexities will be extremely challenging for retailers that rely on manual and time-intensive workflows built on Excel spreadsheets. Retailers will look for more integrated, collaborative and data-driven technologies to navigate this complex retail landscape and to prepare for future supply shocks.

Our next prediction discusses how brands will leverage distribution channels differently. You can see the rest of our post-Covid predictions here.

Looking for more?

Toolio is building the technology and know-how to manage this transformation. If you want to learn more about how technology can help you optimize your supply chain, request a demo of Toolio.

Eytan Daniyalzade
CEO & Co Founder