What do you do with 1,000,000 T Shirts stuck on an airfield in Suffolk?
It might seem an odd question – indeed at any other time it would be an odd question but it’s exactly the sort of challenge facing some of our major retailers as a result of the COVID-19 pandemic.
Over the past half century, we’ve become increasingly dependent on global supply chains. Retailers and manufacturers have chased CPR (Cost Price Reduction) to maintain margins and compete on pricing for a consumer looking at value as one of their primary decision factors. More recently global digital platforms and the internet have opened new channels for manufacturers to sell products internationally and often direct to customers meaning more choice and more competition.
This globalisation has accelerated rapidly since 2000. In 1999 China was the UK’s 15th largest source of imports accounting for around 1%. By 2019 China was the 4th largest imports source for the UK rising to around 7% of all imported product (House of Commons Briefing Paper on the Geographical Pattern of UK Trade). Our reliance on Asian sourced products has therefore markedly increased with manufacturers and sourcing teams being attracted by a combination of speed of production and labour arbitrage compared to domestic production. We’ve also seen the rising influence of LATAM, especially for Food & Beverage production and the US remains the UK’s biggest trading partner with exports from the UK to the US worth $121Bn in 2018 and imports of $77Bn (11% of all imports, placing it second behind Germany as our biggest import market).
The result of all of the above? Longer, more complex supply chains are needed to support the movement of goods.
Most retailers have some seasonality to their business,particularly in Fashion, Apparel and Home Improvement sectors. iIt’s much easier to sell a BBQ in the May than it is in November and radiators sell better in Autumn than they do in Spring.
If we take a typical fashion retailer as an example, they will have 3 core seasons, Spring, Summer and Autumn/Winter and usually these have sub seasons to them with some of the fast fashion retailers re-merchandising as frequently as every 4-6 weeks.
When Boris Johnson announced the enforced closure of retail outlets in the UK on the 23 March most were full of Spring fashion. We would usually see retailers discounting through Spring sales in April to clear stock as they re-merchandise with Summer lines. Summer lines usually give way to the Autumn/Winter range through August. With stores closed the usual cycle and flow of products isn’t occurring and now in mid-May they remain full of Spring fashion.
One of the compromises sourcing teams make when selecting products is the balance between cost and lead time. As a result of globalised sourcing we’ve seen longer lead times for many products. If you look at the traditional garment sourcing markets in Asia of Bangladesh, Vietnam and China these typically need lead times of: 4 weeks for design, 4-6 weeks in production and around 8 weeks in shipping, meaning many retailers are committing to orders around 4 months ahead of landing products onto the shop floor. For significant volumes this can be extended even further. That means that for many retailers their Summer stock is either already in the UK or on ships due to arrive into the UK over the next month.
With retail closures the usual supply chain flow of pushing product into stores has been interrupted. This means inventory in warehouses has been rising as retailers are unable to turn off the supply of goods quickly enough to respond to the pandemic. UK warehouses are therefore under considerable pressure as stock levels are rising and consequentially, we’ve seen enquiries for demurrage related storage. This isn’t exclusively a retailer challenge either as manufacturers have also had their supply chains impacted in a similar manner with closures of manufacturing sites due to social distancing requirements.
When a shipping container arrives into the UK it is usual for the port to allow storage of the container for between 5 and 7 days free of charge before collection. After that it attracts a demurrage charge - a rental cost for keeping it on site. With distribution centres full and product still arriving logistics and supply chain teams are being forced to look at alternative storage options. This could be additional warehousing; it might be reoccupying previously vacated warehousing as we’ve seen in several cases. Alternatively it could be keeping the product in its shipping container and storing the containers away from the ports in low cost locations. We’ve seen rising container volumes not just in ports but also in inland rail freight terminals and even short-term container storage being secured at old airfields and redundant industrial sites.
The next challenge, beyond finding low cost storage for this additional stock will be managing the return and clearance of stock which is now in stores and is out of season. The numbers here can be significant with Primark taking a £284m write-down on its excess stock External Link in April. Range clearance will be a key issue for retailers in the coming months. The debate about whether you discount these in store or look to back haul them into the distribution centre and restock and pack them will be central here. This adds cost but may mean less discounting. It will be fascinating to see how retailers resolve this challenge.
Even pre-pandemic the complexity and increasing length of global supply chains were becoming a point of contention in the industry. We had seen Inditex move production back from Asia to Morocco (which together with Turkey offers the core sourcing markets for garment manufacture in EMEA). This was predominately to reduce the timeline from design board to shop floor which played to Zara’s strengths as a fashion leader, allowing greater turnover of lines through the seasons and more responsiveness in supply.
Shortening supply chains should allow lower inventory and therefore working capital in the supply chain, but it will need to be balanced against potentially increased production costs. The political lens for this has shifted since the outbreak of COVID-19 and we’ve seen increasingly protectionist rhetoric from many governments. This could influence changes to the supply networks further, particularly in the U.S. But that is a debate for another time.