As 2020 comes to a close and the holiday season approaches, retail companies are gearing up for the usual influx of holiday shopping that happens between Thanksgiving and the end of the year. Like many things in 2020, holiday shopping is going to look a little different. E-commerce has been growing steadily for the past decade, and it’s a good bet that growth will continue this year, as customers contend with shopping in the time of COVID-19.
At the same time, the pandemic has radically shifted the way companies manage their supply chains. ASUG sat down with Richard Howells, VP of solution marketing at SAP Digital Supply Chain, to discuss his thoughts on how COVID-19 will affect supply chains during holiday shopping. He talked about the lessons learned from this year, the changes global supply chains have already experienced, and what companies are doing to strengthen their logistics during this busy time.
Jim: When did it become evident to SAP that COVID-19 was going to bring about monumental change?
Richard: I wrote my first blog on the topic on Feb. 12, and that was a bit late. At the start of the year, everybody was writing these fancy predictions of their “20/20” business and supply chain vision. And everyone got it wrong. In late January, everything came to a standstill as factories shut down in China and borders began to close.
Jim: Here in the U.S., it was that third week in March when it felt like a switch was flipped and everything shut down.
Richard: That’s exactly right. At that time, I was in the Bahamas. When I left, things were not that severe on the east coast of North America, but halfway through the week, I wasn’t sure I was even going to get back into North America. It was also in the middle of March that we could see just how big an impact the manufacturing facilities closing down in China would have on the rest of the world. We knew there was going to be a supply issue back in late January. We just couldn’t tell the global scale of the issue at that point.
Jim: What were some of the factors that most disrupted supply chains from a global perspective?
Richard: It all started on the supply side as manufacturing facilities shut down in China while the flow of goods through ports and flights coming out of China also were reduced. As the virus spread across other countries and regions, we saw huge demand changes. It started with the health care industry and shortages in safety and testing equipment across the globe.
As we were all told to stay at home, human nature set in and everyone was panic buying. It’s amazing to me that the world seems to live on the same 20 or 30 different products like bread, milk, hand sanitizer, and, of all things, toilet paper! Demand was skyrocketing for vital commodities, while demand for luxury items dropped off a cliff. It was the ultimate supply and demand challenge. We also began seeing a shortage of capacity, both in manufacturing facilities and in logistics around the world. Even if we had the materials, and even if the manufacturing facility were open, social distancing guidelines meant that companies couldn’t fully staff the manufacturing facility to make their products. And even if they made the products, they had logistics capacity constraints that limited their ability to deliver them to the hot spots.
Jim: How has a lack of transparency in the supply chains been a factor over the past few months?
Richard: Visibility across the supply chain is always critical. Having access to the information to make the right decisions is always vital. But a disruption of this magnitude highlights both a lack of visibility and risk mitigation strategies across the supply chain. You need visibility and strategies in place to be able to both sense and respond to a crisis. If you can’t see there’s a problem, you can’t respond to it. But having visibility is no good if you don’t have the ability and agility to change things in the physical supply chain.
Jim: How did panic buying early on during the pandemic influence the flow of goods?
Richard: If you're a supply chain practitioner, you'll know the bullwhip effect and how any unnatural spike or drop in demand has a ripple effect across the supply chain. For example, the one that affected us all was the toilet paper shortage. The reality is the demand for toilet paper is very stable. There aren’t specific times of the year where you use more toilet paper than others. When there was a run on toilet paper, it’s not as simple as a toilet paper manufacturer simply increasing production. They can only produce the same number of rolls of toilet paper every day, but they can package it differently depending on where the demand is. For example, there was no demand from hotels, offices, or universities. The demand completely switched to the consumer sector. It became a case of how they can package it differently to meet the specific change in segment demand.
Jim: How have companies kept their supply chains moving as they’ve dealt with staff shortages?
Richard: The number one priority was to ensure the environmental health and safety of the employees who are going to work. Are the processes in place to make sure that they’re socially distancing? Can I increase the changeover times between shifts so that we can clean down the workspace before the next shift comes in? You also have to ensure that people aren’t swapping shifts.
And then there is the technology aspect. You scan everybody as they come into the workspace to take their temperature and have procedures before they come into the workplace.
We’re also seeing companies leveraging technology to put sensors on hats and clothing to make sure that people are socially distancing within the workspace. They are getting alerts if employees are getting too close. We’re seeing companies leveraging technology to improve productivity. A lot of companies are looking at Industry 4.0 as an opportunity to do more with a smaller workforce. They’re looking at how they can leverage technology to augment workers, improve their productivity, and give them more tools to do their jobs better.
Jim: What are some of the weaknesses present in the global supply chain that COVID-19 helped expose?
Richard: For about the last 20 years, we’ve been looking to strip costs out of the supply chain. Executives have seen the supply chain as a cost-saving area rather than a differentiation area. When you strip costs out of the supply chain, you source materials and outsource manufacturing in low-cost regions, which are usually a long way away from you. And this can increase the risk in supply chains. The pandemic exposed this risk. For example, there was so much manufacturing done in China that when the borders shut down, it brought everything to a standstill.
COVID-19 has shown that companies need to design their supply chains with risk in mind. It can’t be all about cost reduction. There needs to be a balance between costs and risks. Do you have alternate sourcing strategies? Do you have an alternative supplier in a different country than your normal supplier? Where do you keep inventory? How do you balance your off-shoring, near-shoring, and no-shoring strategies?
Jim: We’ve talked about the lack of transparency, staff shortages, and panic buying. As we near the holiday season, are these factors that supply chain operators are trying to mitigate?
Richard: Things will be completely different this holiday season compared to any other year. It's a completely different shopping experience. It feels like e-commerce has jumped forward six years in the past six months. Some consumers now expect contactless and doorstep delivery. That whole concept of the direct-to-consumer model will roll through to Christmas and beyond.
I wouldn’t be surprised if online orders pass store orders in the holiday season. But a direct-to-consumer model is not just about taking the order online. It means rethinking your logistics processes, too. You will get a higher volume of orders at smaller quantities. Instead of shipping bulk orders to retailers, you must work out how to ship directly to the consumer, again, in much higher volumes.
Jim: Aside from the things you just laid out, what else are companies doing to prepare for the 2020 holiday season? What things are they doing to strengthen their supply chains to meet this demand?
Richard: It’s all about having the logistics processes in place to be able to deliver on time. You need to leverage networks of carriers and rely on business networks to drive and improve customer satisfaction. Companies can’t do it all themselves. We live in a networked economy where your ecosystem of partners is critical in ensuring customer satisfaction. Most companies don’t have their own logistics organization and transportation fleets. They rely on a network of logistics, providers, and carriers. I’m seeing more trucks driving up and down my little suburban street in Massachusetts every day.
I also think we’ll see a lot more subscription-based gifts being purchased. When was the last time that you bought a CD or a DVD? It’s all on subscription now. There’ll be more and more companies offering services or products as a service such as beer-of-the-month clubs.
Jim: Do you think we’re going to see significant disruption this holiday?
Richard: I think the biggest challenge is that we have been conditioned for same-day and next-day delivery by companies like Amazon. I don’t think our supply chains have recovered enough to be able to meet that service level. My advice to consumers, like you and I, is to order early.
Have you upgraded your supply chain technology stack, navigated an SAP S/4HANA migration, or solved an operational business challenge through technology or process improvements? Your peers are eager to learn from your experience at the upcoming ASUG Best Practices: SAP for Supply Chain virtual conference on May 11-12, 2021. Submit your presentation abstract for an opportunity to share your SAP journey.