The economic downturn is not only affecting retailers’ stores but also their supply chains. Liz Morrell discovers how retailers can protect themselves from the risks involved with international sourcing.

Global sourcing may have revolutionised retailers’ supply chains, but the current climate also highlights how exposed retailers now are to the impact of economic changes.

Jonathan Wright, Accenture global director of supply chain fulfilment, says the issue has moved up the boardroom agenda since last year’s fuel price increases. “With the oil price spike last year, transport and Far East sourcing became a real board level item and CEOs and COOs were suddenly getting interested in those costs,” says Wright.

Even small changes have rippled their way down the supply chain to have a very real impact on retailers. All of sudden, they seemed very much more exposed. “From a shipping perspective we were seeing some of the major shippers slow down their boats and put them on a more economic speed, which could add a day to supply chain times,” says Wright.

The subsequent economic global crisis has meant that such issues have remained firmly on the agenda, he adds. “What became clear is that we are operating in a volatile market – in terms of demand, interest rates, exchange rates and transport costs,” he says.

Michael Walsh, head of value chain for Home Retail Group agrees, but says the retailer is managing the situation. “The macro-economic conditions are unprecedented, and the most important factors are the implications of demand on supplier viability, relative competitiveness of regions and commodity prices. We have long tracked all of this in significant detail so to some degree our approach overall, based on balancing competitiveness with assurance of supply, has not changed,” he says.

Gavin Chappell, supply chain director for Boots the Chemists says although Boots hasn’t been badly affected so far, he isn’t complacent. “It’s about an increased risk management approach, trying to understand the risk with our different suppliers, and managing that. The second thing is trying to work hard on flow; rather than having big shipments we are getting little and often so we always have stock in place,” he says.

Wright believes supplier collaboration will become increasingly important – sharing information not only between all divisions of a retail business, but also with suppliers. “That’s the key to success and the more you can bring a supplier in, the better. Regular cross-business sales and operations planning meetings help the suppliers, store managers, marketing and supply chain function work more closely and avoid surprising each other – especially in the area of promotions planning and product introductions,” he says.

Debenhams deputy chief executive Michael Sharp agrees: “Every retailer is facing the same issues. The thing that will differentiate them is how they manage them. The essential thing is to acknowledge the issues and put in place action plans to mitigate those risks, working with all parties in the supply chain. There is no point simply sticking your head in the sand and worrying about it,” he says.

Walsh says Home Retail Group is working more closely than ever with its partners, paying far more attention to the financial health of suppliers and “managing the operational and financial equation through closer dialogue with key suppliers,” he says.

Emma Ormond, PricewaterhouseCoopers international trade consultant, says exchange rate fluctuations are top of retailers’ list of worries at the moment. “All the people I’ve talked to have said they are concerned about exchange rates. Some have hedged against the dollar and people like that are well placed. Others are struggling with the dollar getting stronger,” she says.

the power balance

Retailers have to mitigate cost increases without affecting product quality. Sharp says some of that involves improving sourcing inefficiencies. “That may be about better production, but it’s also about getting the supplier to tighten up their cost prices without reducing quality, because the opportunity for the retailer to pass on the cost through higher prices to the customer has its limitations,” he says.

The economic crisis is also having an impact on how retailers do business with their suppliers. Some suppliers are struggling because they can’t get insurance against the retailers, and further problems arise if the retailer can’t get similar cover either.

For many retailers, the power balance has tipped in favour of suppliers. Some suppliers are demanding cash upfront because those retailers that are looking more vulnerable are finding they can’t get credit.

Such unpredictability has made a retailer’s job more difficult than ever, so what can retailers do? Ormond says: “The trite answer is get the product right and sell, sell, sell but no-one’s buying.”

Wright agrees: “In retail it’s very difficult to forecast demand in any situation let alone during time of volatility,” he says. “Retailers are left to rely on rushed orders, express shipments and unoptimised transport to meet customer’s needs,” he says. As such a dynamic, responsive supply chain is more essential than ever.

He adds that many retailers are having to rethink the very strategies they have introduced to improve their supply chains over the past decade. “A lot of the traditional supply chain strategies – such as low-cost country sourcing, centralised warehousing and off-shore manufacturing are being re-examined.”

Retailers have previously traded off the costs of cheap labour against transport costs but the increase in the price of fuel – coupled with increases in labour costs in the likes of China and India and changing trends such as manufacturing going deeper into the likes of China which has also increased transport costs – has suggested the traditional model needs changing. Retailers also need to be more aware of total landed costs rather than just the unit price of goods.

Walsh says: “As always, a deep understanding of the total cost equation, including currency, shipping, labour rates, raw materials, coupled with a judgement on the relative risks is a prerequisite to taking the right decisions.”

One way of spreading the risk that is employed by many retailers is a dual-sourcing strategy. This allows retailers to use cheap sourcing locations such as the Far East for predictable bulk demand but to source less predictable product – such as repeats – closer to home. Accenture’s research has showed that just a small amount of flexibility in the supply chain will reap 80 per cent of the benefits. Sharp agrees: “Dual sourcing still has a role to play in a turbulent market because it gives you flexibility.”

Such a strategy will also help protect retailers from other factors, too. Factories in the Far East are going bust and there is also the threat of trade defence measures such as antidumping duty. If such measures were likely to be imposed then retailers need to be able to react to and have alternative sources of supply.

Broadening the supply base also helps to reduce risks – a tactic Boots is employing. Chappell says: “We are trying to source from more countries and strengthen our imports capability because of the volatility of the currency,” says Chappell.

John Lewis head of product sourcing Sean Allam says the retailer’s broad product range means it is less affected by the current climate. “John Lewis has noticed the impact of the global downturn on the vast majority of our supply base, however as a full-line department store we have extensive and multiple sources, so our exposure to one market or one source is lower than many other retailers,” he says.

Allam says the retailer is also helped by its strong relationships with its established suppliers. “We have a preference to work with our suppliers over a long period of time. 10-20 years is not uncommon, and jointly we have looked at factors such as transport, currency, inflation etc to identify where we can minimise any impact of the downturn,” he says.

Forecast accuracy is vital and for this retailers will increasingly use analytics within their supply chain. Wright says: “If you look at some of the retailers that came out of Christmas with sales down but profitability up, I think they were much more analytical about how they managed their stock. They had their finger on the pulse in terms of the supply chain and their ability to react very quickly in the autumn when it became apparent that we were facing a tougher Christmas. Those that were stuck with the purchasing decisions of earlier in the year were left to struggle,” says Wright.

These are challenging times for retailers, but Sharp believes there are glimmers of hope on the horizon. “Commodity prices are coming down so we know there are opportunities. Labour inflation is also now being annualised and is starting to fall away with the threat of unemployment.” He adds that over capacity in the Chinese manufacturing base provides an opportunity to negotiate better deals. “There will be fallout and there are factories closing but there is inherently a strong manufacturing base and China are positioning themselves to come out of this downturn. They are not going to roll over and give up,” he says.

It’s up to retailers to ensure they do the same – and carefully managing the risks in their supply chain is an integral part of that.