Diversify Your Supply Chain to Protect Your Business
Walk into almost any retail store, essential or not, since the start of 2020 and one of the first things you notice is empty shelves. The reason is obvious: the world became overly dependent on manufacturing from China to fill those shelves. That’s why having a diversified supply chain with products coming from different parts of the world is so important to businesses today.
The coronavirus pandemic isn’t solely to blame for those empty shelves. Domestic retailers have been experiencing “outs” since the United States and China entered a trade war in 2018 long before the world had ever heard of COVID-19. Shortages have ranged from hosiery to heavy equipment because the bulk of world manufacturing has been used as an international poker chip and American retailers have been rolling snake eyes. And the worldwide pandemic, which shut down Chinese manufacturing and eventually global retail at the start of 2020 raised the stakes in demonstrating how dangerous it is to rely so heavily on so few suppliers.
The Real Retail Apocalypse
The Retail Apocalypse, which e-commerce companies began over a decade ago, pales in comparison to the damage done over a few months as the world’s manufacturers shut down due to the novel coronavirus. E-commerce, while still growing steadily, still accounts for only about 10% of total retail sales in the United States. In 2018, U.S. imports from China totaled $539.5 billion, an increase of 59.7% over 10 years and an increase of 427% since 2001.
The top items imported range from electrical machinery ($152 billion in 2018) to toys and sporting goods ($27 billion). So, when China closed Wuhan’s manufacturing plants to protect workers from the rapidly spreading virus, it hit almost everybody worldwide, no matter what their interests and it hit retailers hardest.
According to a recent survey of global supply chain leaders, the research firm Gartner found that a third of the global supply chains had already moved manufacturing or sourcing out of China or planned to do so over the next three years.
Closer to Home
Even though the global supply chain ultimately affects the ability of American retailers to stock their shelves and make sales to hungry shoppers, it meant little to businesses forced to close during the coronavirus outbreak. However, businesses deemed essential by federal and state governments were forced to grapple with shortages or items that were just not available. And they had to do it as their business spiked. Toilet paper, isopropyl alcohol, hand sanitizer and other cleaning supplies were some of the most common items grabbed up by hoarding consumers.
As most businesses locked their doors, hardware stores, grocery stores, pharmacies and other businesses boomed even though their suppliers couldn’t fulfill their orders. Hardware Retailing reports that nearly 72% of retailers in the hardware industry said their sales rose compared to the same period in 2019. However, 90% of those same retailers said their supply chain failed in many areas during the outbreak.
Many retailers utilizing automated ordering systems – electronic data interchange (EDI) – that relied on single suppliers were left wanting, saw their shelves empty, and watched as their customers searched elsewhere. Thirty-six percent of those independent retailers sought to diversify their supply chain during the outbreak and nearly 20% resorted to buying products directly from manufacturers to keep their shelves stocked.
Retail businesses have long had two basic strategies for stocking their stores. On one end, stores have sought to develop strong relationships with a few vendors and worked with them extensively to secure reliable supplies and discount pricing. At the other end of the spectrum are businesses that have a vast array of suppliers and are constantly shopping for the best deals. Most stores fall between those two extremes.
Placing all your eggs in one basket has advantages and disadvantages.
- It’s always easier to have fewer vendor relationships. It reduces administrative costs, ordering costs, and stores can often secure favorable ordering schedules and pricing when dealing with a single supplier.
- A store’s inventory is completely dependent on the supplier’s ability to deliver products. Pricing and margins are also tied to a single vendor.
The U.S.-China tariffs and the coronavirus pandemic exposed weak links in the global supply chain. The fallout from the tariffs caused many worldwide suppliers to begin shifting away from a reliance on China for so many of their goods, and the from COVID-19 created unprecedented problems for suppliers and retail businesses. It forced stores to drastically alter their ordering processes because their doors were closed. The apparel industry was extremely hard hit by the shutdown with coronavirus being the knockout punch for companies like JCPenney, Brooks Brothers, J. Crew and Neiman Marcus.
Other businesses deemed essential – hardware, pharmacies, big-box department chains – bought more to fulfill increased consumer demand. Many independent businesses experienced triple-digit increases in demand. Lowe’s sales in the first quarter of 2020 were up 11.3% over 2019, while Ace Hardware was up 3.8%.
The U.S. LBM industry was forced to aim at a moving target in the first quarter of 2020. Many industry experts speculated the economic shutdown would crater new home construction. Mills curtailed production and then many closed due to health and safety concerns.
The relatively quick rebound of home construction and a sharp spike in DIY home projects from people suddenly out of work or working from home made lumber supplies plummet and prices skyrocket.
According to the National Association of Home Builders, the Random Lengths Framing Composite Price reached $523 per 1,000 board feet for the week ending July 10. It was the first time since July 2018 that lumber prices have topped $500. It also marked a 50% increase since April 17.
The resulting upheaval has left the businesses that have remained standing with some valuable lessons. It’s not wise to place all your supply chain eggs in a single basket. It’s also smart to have the ability and data you need to change your ordering processes quickly and efficiently.