Analyst Insight: Retailer supply chain and procurement teams, beaten and battered after two years of dealing with supply challenges in an inflationary and consumer demand-driven environment, are bracing themselves for a different type of storm.
As supply improves, economic uncertainty and fears of reduced consumer spending will necessitate a pivot to an intense focus on savings and margin enhancement — all while satisfying ever-increasing demands around environmental, social and governance (ESG) issues.
Following are the main themes that arise in discussions with retail partners today.
Inflating inventories. After recovering following supply chain shortages in 2020 and 2021, consumer demand has deflated. Retailers are left sitting on a glut of inventory, and are equally worried about the erosion of margins caused by heavy discounting intended to avoid the burden of excess stocks at the end of the peak season.
Fears of recession. Transportation rates, a leading indicator of economic challenges, have fallen off precipitately, raising real concerns about consumer sentiment and the health of the economy going into 2023. There’s the potential for inventory issues to be compounded by reduced consumer spending, and for inflation to outpace increases in demand for the year.
The need for new procurement strategies. In 2023, we’re beginning to see some relief in critical areas of spend. Savvy procurement leaders will quickly pivot from firefighting through price increases, and instead adopt a proactive approach to regaining margin.
In a sharp turn of events from 2021, suppliers have begun seeing excess capacity in their business. Procurement leaders can capitalize on this by introducing competition into the current supply base. Organizations failing to survey the market in areas like transportation are leaving money on the table. Now is the time to re-source and re-contract rates where current agreements allow.
Most major commodities, including paper and plastics for store bags, and metals for fixtures, are falling, and the moment has come to take advantage of the softening. By following indices that drive costs in key categories, retailers can drive pricing decreases in line with the market, and tie future market softenings to those indices.
Retailers with global supply chains should pay attention to currency exchange rates. The U.S. dollar has grown stronger in relation to the Chinese Yuan, opening the door for price concessions wherever suppliers are paid in dollars today.
ESG concerns. With the growing focus on ESG, organizations can simultaneously accomplish two goals by looking for joint sustainability and profitability wins. Companies should consider changes such as shifting specifications for shopping bags to recycled kraft bags, reducing materials used in shipment packaging, and consolidating shipments to minimize the number of trucks on the road. Organizations should also rely on competitive sourcing events to identify diverse and minority-owned suppliers, and evaluate renewable energy opportunities such as solar panels for brick-and-mortar stores and distribution centers.
Outlook: Retailers may indeed be facing inflated inventory levels and a looming recession. But shrewd procurement leaders can take advantage of numerous opportunities to combat these challenges, actively attack spend, and recapture margin.
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