The Global Connection
As retail supply chains grow increasingly larger geographical footprints, they become more susceptible to risk. Retailers have long prepared for natural disasters and geopolitical events, but ongoing financial crises and uncertainty has them even more concerned.
Experts say that retailers have to become more aware of regional economic conditions — even in countries where they don’t operate — because ripple effects of sovereign debt problems, currency devaluations and debt downgrades can have impacts in surprising places.
“All supply chains are global nowadays,” says Lorcan Sheehan, senior vice president of marketing and strategy for supply chain solutions provider ModusLink. “There’s a lot of geography and you’re dealing with fluctuations in costs and capacity issues. There are more people touching that chain, from manufacturing to the time it reaches the consumer.”
Predicting demand and disaster
I n recent times, Hurricane Katrina in New Orleans, the tsunami in Japan, the volcanic eruptions in Iceland and instability in Thailand have all negatively impacted supply chains. But a growing concern is the economic uncertainty and instability that started with the collapse of Lehman Brothers in 2008. While catastrophe was averted here at home, the crisis eventually spread to Greece and Spain, which face increasing problems with sovereign debt.
Ira Kalish, director of global economics for Deloitte, says this is the most volatile and uncertain time the global economy has seen in the post-war era.
“The last time we had this much uncertainty was in the 1930s,” he says. “It’s not as bad now because governments have better tools and understandings of the economies to prevent catastrophe. But it’s still a serious concern.”
The mere suggestion of possible financial collapse can cause big problems for retailers, who need to not only predict consumer demand but also how economic calamities can impact manufacturers and suppliers down the line. Vinod Rangarajan, a supply chain strategist for Kurt Salmon, says retailers need to think about sourcing today for a product that will be on store shelves a year from now. Failure to properly forecast demand or prepare for problems in manufacturing or packaging can lead to inventory excesses or shortages.
Seasonal supply chains
T his can be especially critical during the holiday shopping season. Most retailers already have holiday merchandise in the supply chain, whether it’s just being sourced, currently in manufacturing or being shipped overseas for packaging.
Because processes can take place in so many parts of the world, everything has to be in sync: A product may be sourced in Thailand and India, assembled in southern China, packaged in Vietnam and then sold in Spain.
“Dealing with seasonal spikes in demand is a big challenge, especially with such long lead times,” Sheehan says. “It’s an increased risk for retailers as they think about the holiday season.”
The 2008 holiday season caught many retailers off guard, he says, because no one expected the collapse of Lehman Brothers. While the recession reportedly began in December 2007, the real panic started in September 2008 when many banks in the United States and Europe suffered massive losses and faced bankruptcy. That uncertainty rippled throughout the stock market — and combined with further plunges in the housing market, had a tremendous impact on consumers. By the time December arrived, market conditions had deteriorated and the 2008 holiday shopping season proved to be one of the worst retailers had seen in decades.
Retailers “were planning at a time when they started to see upward curves in demand,” Sheehan says, “but by the time they got to the season, it had weakened significantly.”
Indirect European impacts
While troubles in Europe continue to brew, Erik Autor, vice president and international trade counsel for the National Retail Federation, says most major U.S. retailers don’t have that much exposure to European consumers. In terms of direct supply chain impacts, little manufacturing for U.S. retailers is done in Europe.
Of greater concern is the potential collapse of the Eurozone. Most experts and economists say it’s unlikely, but the threat remains real. Kalish says many European governments are tightening fiscal policy and many credit markets have seized up. The mere perception that there’s a risk of Eurozone failure has also inhibited some businesses from investing in Europe. A total collapse would not only lead all of Europe into a deep recession, it would create a massive ripple effect throughout the global economy.
Because Europe is a top importer of Chinese goods, weakened demand has had an impact on manufacturers and the broader economy in that country. Further problems in Europe could exacerbate the situation: In late July, the International Monetary Fund said that the slowing Chinese economy could face turbulence from the crisis-plagued Eurozone. The IMF also said there were risks in China’s property sector and banking system, as well as with the balance sheets of local governments.
“Here in the U.S. the economy has also slowed in recent months, at least partly because of weakened demand in Europe,” Kalish says. “U.S. businesses could also be worried about a catastrophic event in Europe and that has held back some of their investment and hiring.”
All of this angst trickles down to consumers, affecting employment and investments. As of June, U.S. unemployment hovered around 8.2 percent. In July, consumer sentiment fell to its lowest level of the year as Americans took a dimmer view of employment and income prospects.
More economic vigilance for risk mitigation
Retailers are increasingly adjusting their supply chains and doing what they can to mitigate risk. Kalish says some have been compressing their supply chains closer to their markets, while others have been making them leaner, shifting more of the risk up the line to the manufacturer.
Rangarajan says more companies are monitoring such economics on a daily basis, not just in their consumer markets but in every nation and region that touches their supply chain. They look for possible scenarios, determine their risk level and then plan for those events. On top of that is the looming threat of large-scale natural disasters.
“There are things you can’t always predict, but you can have a plan in place for a scenario that you think could happen,” Rangarajan says.
Sheehan says many retailers are now “geotagging” their suppliers: By having an complete map of the chain from supplier to consumer, retailers can better visualize and plan for scenarios that could impact their manufacturing, logistics or consumer demand. Other companies are starting to move their supply chains closer to the United States, to countries like Mexico and Honduras. But even there, market and political conditions create their own risks. In an ever-changing world, Sheehan says the only solution is ongoing risk mitigation throughout the entire supply chain.
“The thing that is fundamental is awareness,” he says. “It’s not just the manufacturing, it’s the components and where they come from.”