The disruptions in the global supply chain are the result of a confluence of factors—which means that retailers have to take action on multiple fronts if they want their store shelves stocked and online orders fulfilled on time. In this episode of the McKinsey on Consumer and Retail podcast, retail supply-chain experts John Barbee and Sarah Touse offer advice to retailers ahead of what’s shaping up to be another unusual holiday season. Subscribe to the podcast.
Monica Toriello: If you haven’t done your holiday shopping yet, it might already be too late. That seems to be one of the takeaways from all the recent headlines about disruptions in the global supply chain. As has been reported, there are many reasons for these disruptions, so there isn’t one magic solution for retailers. Today, our two guests will share their insights on the range of supply-chain issues and what retailers can do in advance of what’s sure to be a challenging holiday shopping season.
John Barbee is a partner based in McKinsey’s Atlanta office. He works with many retailers and consumer-goods companies on their omnichannel, supply-chain, and fulfillment strategies. He is one of the authors of a recent article titled “Retail’s need for speed: Unlocking value in omnichannel delivery.”
Sarah Touse is an associate partner in McKinsey’s Boston office. Sarah, like John, has advised a wide range of retailers and consumer-goods players on supply-chain topics. Sarah has coauthored a number of retail articles, including one most recently on how retailers can build supply-chain resilience. Thanks for joining us, John and Sarah.
There’s been a lot of press about the supply-chain crisis, and it’s been attributed to a host of factors: logjams at ports; huge, unanticipated spikes in consumer demand; labor shortages; and so on. From your perspective, is there one thing that’s the biggest problem? Or are they all equally big problems?
John Barbee: That’s a conundrum, Monica. There’s no single biggest problem. The good news is that some of the disruptions will pass, such as overseas vessel delays and container shortages. For these issues, the optimist would venture that they’d be resolved by the first half or early second half of next year. However, the pessimist might see this backlog last through 2023.
The other issues—such as labor shortages—have been a long time in the making. Hourly wage rates have escalated over 20 percent in the past 18 months, and investments in technology and automation in distribution centers have been elevated and are now at the forefront of most chief supply-chain officers’ agendas.
Investments in technology and automation in distribution centers are now at the forefront of most chief supply-chain officers’ agendas.
Sarah Touse: The numbers are just staggering. If you look at the resignation rate, it’s 13 percent higher than prepandemic levels. During the pandemic, 3.5 million people retired, which is two million more than usual. There are ten million job openings right now. There’s a whole host of factors underneath that, but for me one of the takeaways is just how fundamentally this pandemic has changed how Americans—and people around the world—think about their careers and their jobs and how they want to spend time.
Retailer strategies and no-regrets moves
Monica Toriello: What are some things that retailers have done that really made a difference in their supply chain or gave them competitive advantage?
Sarah Touse: There are a few things that smart retailers have done. One is around pricing and promotions timing. Whereas in some years Black Friday would be the day when the holiday season starts, this year we saw holiday pricing and promotions as early as October. Some of that “pull forward” to smooth out the demand curve has been important.
Another thing that retailers have done is to thoughtfully raise prices. Some of the increases in logistics costs can’t be avoided even if you are a smart retailer, so understanding how much of that you can take to your bottom line and how much of it has to be passed along to the consumer—and then thinking about how to do it in a way that’s minimally disruptive to the consumer—has been really important.
And then, finally, retailers are thinking about supply-chain triage. Many retailers, earlier in the fall, recognized that these challenges were deep and they anticipated that they’d have trouble getting product when they wanted it. So, retailers that have been mindful about which products are most important to get onto shelves—taking into account what consumers want, as well as their own revenues and margins—are seeing that advantage play out as we get closer to the holidays.
John Barbee: There have been a few interesting retailer strategies that aren’t necessarily available to all retailers, but we’ve certainly read about some retailers—such as Home Depot, Costco, Walmart, Ikea, Target, and others—taking some of the shipping issues into their own hands, so it gives them a little bit more control. They’ve done this by leasing vessels to carry their containers from overseas.
Other retailers pre-bought capacity, particularly air freight. For those retailers that have more speed-sensitive product or seasonal product, this proved to be a good strategy in that they were able to bypass some of the shipping disruption. And in cases where they had excess capacity, they could even sell it to others.
Sarah Touse: For last-mile delivery, historically, many retailers thought, “I’ve got FedEx, UPS, and the US Postal Service.” Those retailers are seeing the pain right now of very congested large integrator networks. A retailer that is now facing a little bit less pain is one that, a few years ago, decided to lean much more heavily on regional players—the LaserShips of the world—and that has enabled the retailer to have more avenues to get their products directly to consumers.
Monica Toriello: Are there any no-regrets moves that retailers should be making right now?
John Barbee: It comes down to the basics of omnichannel fulfillment operations. I think of this in two parts.
Part one is that retailers should seek to maximize availability of product across all channels, offer convenient options for fulfilling demand, and make sure that the value of their product and fulfillment conveniences remains competitive in their market. In our latest consumer research, we find that consumers continue to change their shopping behavior, with three-quarters making some change and 40 percent completely changing brands because of the lack of availability or perceived value in fulfillment. For chief supply-chain officers, this will mean working closely with their digital and store counterparts this holiday season to ensure that they have the blocking and tackling in place to deliver fast and reliable fulfillment to consumers.
Part two is innovate. During this pandemic, retailers have really pushed the envelope on innovation. Things like curbside pickup, buy online and pick up in store, and even concierge services—these things came to life faster than most retailers would have anticipated and fundamentally changed the way retailers think about deploying and testing new capabilities. So I think we will start to see a lot of experimentation with fulfillment models.
We may see more partnerships. For instance, Best Buy partnered with Instacart, which has traditionally served the grocery market. The same is happening in the beauty category with Sephora. Kohl’s for some time has been taking Amazon returns. So there’s been a lot of innovation in retail, and I think we’ll continue to see more.
Sarah Touse: I’ll highlight two things. The first is around visibility: the ROI of investing in greater data assets is always tricky for retailers. This pandemic has made it clear that data are important. Our recent research shows that a typical company will lose more than 40 percent of one year’s EBITDA [earnings before interest, taxes, depreciation, and amortization] over the next ten years because of disruption. Those numbers make the investment in data—to enable retailers to have a more dynamic supply chain—really seem well worth it.
Second, retailers can do a lot to shape customer demand. As retailers think about how to push customers to buy online and pick up in store so that they can avoid some of that congested small-parcel market, and as they think about how to change shipping speeds and promises for different customer segments, it’s important to remember that customers react differently. There are things that retailers can do to shape some of those expectations.
The need for visibility
Monica Toriello: Both of you have mentioned visibility. Sarah, in your recent article, one of the things you say retailers must do in the near term is “stand up a digital control tower” so that they can have real-time visibility into what’s happening in the supply chain rather than having their data reside in siloed systems. You say a digital control tower “typically improves fill rate by 10 percent and reduces excess inventory by more than 30 percent.”
Can you give us a sense of how hard it is for retailers to establish a digital control tower? I imagine it’s a good thing to have even when there’s no global supply-chain crisis, so why haven’t retailers done this already?
Sarah Touse: Retailer organizations are doing the best they can, but we know that retailers—like companies in many other industries—are fairly siloed. Having an effective control tower relies on a few things. It relies on data, and, again, many retailers are operating disparate legacy systems and don’t have one source of truth. It requires a lot of coordination between supply chain, marketing, and merchandising—and those entities haven’t always had the forum and, in some cases, the willingness to make difficult last-minute calls in a joint manner, day in and day out.
John Barbee: Over the past 18 to 24 months, these supply-chain disruptions have awakened supply-chain officers in retail to the need for visibility. They’ve had to navigate some really challenging numbers, with on-time in-full deliveries to distribution centers in the neighborhood of 20 to 30 percent. That’s really disruptive. As they think about the future of their supply-chain capability, they’re now having to think hard about things like digital control towers, which, by the way, is not a new capability or technology; it’s been around for some time. It’s just that over the past 18 to 24 months, in retail in particular, the need for these capabilities has really been heightened.
Traditionally, the challenge has been justifying the ROI for these visibility investments. Retailers know that visibility is good and will help them make better decisions, but they’ve never really felt the need because they’ve never had this level of disruption. So the time is right to pull in these types of capabilities.
Shaping and forecasting consumer demand
Monica Toriello: Another lever you mentioned was shaping consumer demand—retailers seeking to influence what consumers buy and how they buy it. What are some ways retailers can do that?
John Barbee: One thing that will never go away is the theater of stores. Stores will always have a role in the future of retail. Customers like to discover and explore and physically experience products; there’s excitement in that. It may not make sense in all categories, but certainly for some, retailers should think about the theater of the store, how to showcase products and get customers excited, and what might get people out of their homes and into stores to the extent that it’s safe for them and their communities.
Sarah Touse: During the height of the pandemic, one retail executive said, “You know, Sarah, the thing that’s shocking is that with everything going on in the world people are still coming to our stores and they’re still shopping.” This was a nonessential retailer that had just reopened its stores. That stuck with me—the notion that part of the reason we shop is because we need things, but another part of the reason we shop is because, when done well, retail is fun. So, to John’s point, retailers should think about redefining the in-store experience to make it something special, because the consumer is ready to get back into stores in addition to shopping online.
Monica Toriello: Are consumers just going to have to pay higher prices? One of the shocking things you say in your article, Sarah, is that the cost of shipping an item could go up by $6 or more. Talk a little bit about pricing expectations, both from the consumer’s and the retailer’s perspective.
Sarah Touse: Retailers want to provide the best value for their guests, so they try to figure out how much of the price increases they can absorb. But the margin structure means that when you are seeing the magnitude of price increases we’re seeing, retailers fundamentally can’t absorb those increases and still remain profitable. So they’ve needed to raise prices.
In October, inflation was 5 percent, so I would say that, yes, consumers are already feeling it and seeing it. And as long as some of these exorbitant rates for getting product from here to there persist, we’ll continue to see retailers raise prices even while they do their very best to try to think of creative ways to mitigate costs.
John Barbee: It’s hard to untrain consumers when they’re so used to certain levels of pricing. One of the elements of the American online market is the prevalence of free shipping. The US consumer has shown a resilient willingness, if you will, to not pay for any shipping costs. Thinking about the value equation online—not just the price of the goods but also the price of delivering the goods—will be important for the economics and the P&L of an omnichannel retailer.
Sarah Touse: I think some of the exorbitantly high rates that we’re seeing right now will calm down, but some of the underlying fundamentals of this market mean that getting products from place to place is getting more expensive. So building those costs into both your annual operations planning and your long-range planning is wise to do at this point.
Monica Toriello: One of the things that seems to be very hard for retailers during this pandemic is anticipating consumer demand, because it’s been so volatile. Have you seen any retailers do a good job there? And if so, how have they done it?
John Barbee: It has befuddled executives across all sectors, whether it’s grocery, apparel, home goods, sporting goods, and so on. What they’re grappling with is “How much of the COVID-19 lift that we saw in the online channel is here to stay, and how much will shift back to stores? Will we continue to see positive comps [comparative-store sales]?”
In some sectors, retailers were anticipating flat or even depressed sales going into this holiday season, and they’ve been pleasantly surprised—caught off guard, even—that comps continue to be positive. They’ve been up anywhere between 8 and 15 percent compared with last year, and up 30 percent or more from 2019. This underscores the importance of great omnichannel fulfillment strategies to allow retailers to move product more seamlessly across their retail stores, their online channels, and—to the extent that retailers choose to play in marketplaces—in complementary nontraditional retail channels.
Sarah Touse: The way that retailers forecast demand is being forced to change. Historically, if I were a planner, I would just take the prior year’s plan and make adjustments to it up, down, and sideways across categories, and that was my plan for the next year. Then 2020 happened, and retailers said, “2020 will be a one-time deviation versus 2019.” But, as the pandemic persisted, they then said, “2021 will be another one-time deviation.” Now, as we look toward 2022, it no longer makes sense to say that every year is just an absolute deviation from the year prior.
So some of the best retailers are going back to their analytics and saying, “How can we get more sophisticated in looking at the demand signals in the market and getting more dynamic forecasts?” That way, it’s not a matter of looking at what happened last year and assuming that it’s going to continue, but really looking at what’s happening in the market today and understanding what that’s going to mean a few months hence.
Supply-chain talent and capabilities
Monica Toriello: What does that mean for supply-chain capabilities? If you’re hiring in your supply chain today, are you looking for different things than you were looking for in 2019?
John Barbee: Capabilities, and talent more broadly, is generally one of the top three priorities of most chief supply-chain officers today. What they’ve found, generally speaking, is that money is not enough to retain warehouse workers, so they’re exploring a number of creative benefits, whether that’s paying for college, offering same-day pay, giving more time off or accelerated health benefits, and so on. I had an interesting conversation with a chief strategy officer at a retailer, who said that one of the things that retailers sometimes don’t think about is the need for childcare.
As for back-office talent, the rise of automation in distribution centers and the use of technology and analytics are fundamentally shifting the skills of the contemporary supply-chain manager. Typically, in operations, it was about executing great processes—getting on the floor, working with people, and being “in the moment” in execution. It’s very exhilarating, by the way.
But when we get into more automated environments, it requires a very different skill set to manage the end-to-end supply chain. It requires being able to interpret data and recognize patterns. And I’d say one of the greatest shifts, particularly in omnichannel, is the cross-functional nature of how supply-chain managers need to work. To Sarah’s earlier point, typically the supply chain was relatively siloed. Their task was to move goods from point A to point B in the most efficient way possible. Nowadays, supply chain requires close coordination with merchandising, marketing, inventory, and planning. Working with such a cross-functional team requires people who are more agile than those you’ve historically seen in a supply-chain organization.
Sarah Touse: One other aspect that is increasingly important is having true strategists who are sitting in supply-chain functions and thinking deeply about consumers. As John said, historically the thinking was that the commercial organization would set a value proposition and the supply-chain organization would execute on it. Now, our data would show that things like delivery speed and return policies have a big impact on how consumers think about that enterprise and its value proposition. So having strategists sitting in those roles who are thinking about the impact of their decisions not just on the bottom line but on the top line as well is increasingly important.
One aspect that is increasingly important is having true strategists sit in supply-chain functions and think deeply about consumers.
Advice to supply-chain officers: Recharge and reset
Monica Toriello: Let’s close with this question: If all the supply-chain executives in the world were in one room and you could give them one message, what would it be?
John Barbee: Having spoken with a number of chief supply-chain officers, I know the past 24 months have been a marathon. A lot of them are tired and worn out; they’re human beings. And they’ve done a tremendous job of navigating an unprecedented amount of challenges.
As they take time to recharge themselves and their teams, I would urge them to think about resetting their own supply chain and challenge the way that retail supply chains have been set up for decades. Take risks. The COVID-19 pandemic proved to us that we can move quickly. We can test; sometimes we’ll fail. Supply chain, by the way, hasn’t always been thought of as one of those capabilities that you can quickly test and learn, because there’s infrastructure that takes years to build, but we’ve turned that on its head. So I would encourage chief supply-chain officers to have the courage to take risks and use this as a moment to develop new sources of competitive advantage as they think about the future of retail.
Sarah Touse: I would tell them, you’ve never had a better audience than you have now to really think through what you need for your supply chain to be successful, given all the disruption we’ve seen. Your CEO, your CFO, your board—they’re all thinking about this. So, as tempting—and perhaps necessary—as it is to just be in firefighting mode all day long, it’s imperative to take that step back and think about the future.
The other thing I would say is, all else equal, I’m still able to go to the grocery store and get food. I’m still able to get my kid a toy for Christmas. In an extraordinarily challenging environment, there’s actually a lot to celebrate. The fundamental items we need to keep living the way that we’ve been living have continued to be available. In many cases, that’s a testament to all of the great body of work that’s happened over the past 24 months. Hopefully, they’ll be able to kick back just a little bit over the holidays before jumping back into it in 2022.