Butterfly effect of late goods

It only takes a hitch somewhere along a complex supply chain for critical components or finished goods to be late reaching their intended destination, so businesses need to develop contingency plans

Remember when UK meat producers, soft drinks manufacturers and brewers were hit by an unexpected shortage of CO2? It was largely the result of falling demand for ammonia, from which CO2 is sourced, and the hot weather, which resulted in an increase in demand for drinks. The shortage saw some companies stop production of certain lines for a time, resulting in lost sales and damaged reputations.

That was the summer of 2018 and earlier in the year a similar situation had arisen when a business found itself having to shut down restaurants because a new supplier failed to produce and deliver enough chicken.

The turbulence of Brexit negotiations raise the possibility of shortages or supply chain issues across a wide range of products, including pharmaceuticals, and essential food and household items.

Supply chain and risk managers need to have contingency plans in place to ensure they can cope with disruption

Complex supply chains often stretch across countries and even continents, increasing the potential for something to go wrong. The effect of late products threatens to impact suppliers further up the chain, retailers and, ultimately, customers.

“Products arriving late causes significant issues in a supply chain,” says Emile Naus, director at supply chain consultancy BearingPoint. “There are two effects. First, there is an immediate shortage, leading to lost sales and expediting. Secondly, inevitably, the reaction will be to buffer additional stock, leading to additional working capital requirements and associated costs.”

In some sectors the consequences can be devastating, says Alex MacPherson, director of solutions consultancy at Manhattan Associates. “Late goods are a huge issue and are something that affects almost every industry, particularly apparel fashion,” he says. “If these goods aren’t in store when consumers demand them, retailers can forgo a significant amount of revenue in lost sales and, worse still, can lose those customers to a competitor for good.”

Lost sales as a result of late goods can also have an indirect or knock-​on effect in terms of excess stock, warns John Perry, managing director of supply chain and logistics consultancy SCALA. “If too much is supplied, then there is wastage, often in the form of out-​of-​date stock,” he says. “If too little is supplied, consumers are dissatisfied and direct sales are lost. A knock-​on effect of this is the impact this then has on sales of other products, with consumers often turning elsewhere to purchase what they need, feeling confident it’ll be available.”

One way of coping with possible supply shortages or delays is to build up extra stock which can be drawn on when needed. This is the approach steel manufacturer Bromford Iron & Steel takes. “The occasional supply chain disruptions for us are either caused by our suppliers not meeting their delivery promises due to either their own production problems or transport and logistics issues such as the late arrival and unloading of a ship,” says Andrew Rich, operations director.

“The simplest way to protect ourselves is to have stock somewhere in the system. Using real data to analyse order patterns and supplier reliability, we can forecast usage and place bulk orders, and ensure the stock is in place somewhere. We then work on getting this stock as close to Bromford’s production line as possible while paying strong attention to cash flow.”

Digitisation has redefined how retailers can react to events that affect their supply chains — Wayne Snyder, vice president of retail industry strategy at JDA

The key is for retailers, manufacturers and suppliers to work together and share information, says Mr Naus. “In reality, delays will happen; traffic, accidents, weather and industrial disruption will occur,” he says. “The best supply chains have built-​in flexibility and proactively monitor the operations in real time. This goes beyond your own business and your immediate suppliers. Having a connected view of your supply chain with the relevant alerting systems allows redirection of product flows, prioritisation of shipments and rescheduling of plants before it is too late.”

Supply chain and risk managers need to have contingency plans in place to ensure they can cope with disruption. “The right model depends on the business,” says Wayne Snyder, vice president of retail industry strategy, Europe, Middle East and Africa, at JDA. “For example, many retailers with offshore sourcing will aim to bring stock into their warehouse many days before the intended launch date to enable time to process and prepare, so can manage small delays in producing and shipping. Business need to understand the nature of their product and the impact of an issue; not all problems are equal.”

Learning from experience is vital, says Kurt Cavano, founder and president of GT Nexus. “The best companies learn to analyse each mistake and flaw, from quality incursions to missed deliveries, to isolate root causes and eliminate them,” he says. “This is similar to how the best sports teams function; they practise potential mistakes and how to recover from them.”

It’s also important to ensure the right arrangements are in place ahead of any eventuality, adds Wendy Hopkins, partner at law firm DAC Beachcroft. “Businesses need to understand where responsibilities lie, which may necessitate a review of contracts and trading terms on an individual customer and supplier basis,” she says.

“Supply chain disruptions, and the financial losses entailed, are insurable and not just in cases of actual physical damage. Many insurance companies offer supply chain consulting services to map a customer’s supply matrix and identify key exposure, with significant premium discounts for companies that adopt risk assessment and mitigation planning measures.”

The use of new technologies is helping businesses get to grips with the potential risks from their supply chains and this is likely to become more prominent in the future. “Digitisation has redefined how retailers can react to events that affect their supply chains,” says Mr Snyder. “Data and cloud services will make supply chains more autonomous than ever before and, coupled with artificial intelligence and machine-​learning, we are already seeing systems making smart decisions without the need for human intervention.”

Some retailers are using predictive analytics to change their online order fulfilment distribution models entirely, says Matthew Wright, associate partner at EY. “Rather than automatically shipping online orders from a central warehouse or from the store closest to the customer, retailers are using analytics to fulfil the order from the store where products are selling most slowly,” he says. “This approach protects stock of that product in stores where sales are highest and reduces stock of the product in stores where the product is selling slowly, leading to significant reductions in markdowns, higher profits and robust returns on investment.”