Why focusing on a responsive supply chain is the solution to sustainability
Consumers care about sustainability, and this is leading to more ethically conscious purchasing decisions. However, in contrast to this, many companies are still behaving in the same way as they have for decades. A surprising number of them still use ‘old practices’ to manage their inventory and supply processes. They lean heavily on squeezing as much cost-efficiency out of their processes as possible. This has a number of negative effects, including the inevitable waste and missed sales that result from inaccurate forecasting and large order-sizes.
Some companies have already started to experiment with new supply models. Most notably, Direct-to-Consumer (D2C) models have become much more common. This type of supply model exploits a closer relationship with the customer to supply small quantities of desired stock directly to the individuals that want to consume it, thereby bypassing supply chain intermediaries and retailers. This trend reflects the consumers’ desire for the immediate sating of current trends and fresh styles. This supply model has been remarkably successful for most of the companies that have adopted it.
However, many brands and retailers, including giants like Target, Walmart, and Nike, still fall short of fulfilling the demands of the modern consumer and matching their evolving buying habits.
Too much dead stock
Despite beating analysts’ earnings estimates in Q4 2021, Nike’s stock tumbled significantly due to concerns about supply from China. This comes in tandem with concerns about excess ‘dead’ stock. Like many, the company is still being weighed down by excess inventory resulting from shifting consumer habits, despite launching its incredibly successful D2C initiative. The sudden shift in lifestyle and demands due to the pandemic was seen as a major influence.
Walmart and Target have also been exposed to this problem, and it has laid bare the massive liability that comes from a business model rooted in the relentless pursuit of cost-efficiency.
The Bullwhip Effect, or Forrester Effect, is largely to blame for companies having the wrong inventory. It is a direct result of long supply lines, long replenishment periods, large order sizes, bulk-purchase and other ‘cost saving’ incentives, and a lack of visibility across the entire supply chain. These factors lead to increasing orders of deviation from the ‘right inventory level’ at every step up the supply chain. But this is avoidable.
How implementing a responsive supply chain helps with becoming more sustainable
A responsive supply chain can help all stakeholders in the chain adopt a more sustainable way of working – while generating more profit.
The responsive mechanism differs from the old method, because only stock that will sell is put into the supply chain. Cash is only invested in products that will be converted into cash, instead of investing in large quantities of products with an unknown destiny.
As a result, materials, capital, and energy are only used to produce stock that sells, which reduces waste considerably.
Instead of working towards achieving cost efficiency, the responsive model looks to maximize Throughput. This is a measure of cash flowing through the supply chain in the form of purchased goods. Throughput can only be maximized when the supply chain retains enough flexibility to produce more, or less, when needed, and at much shorter replenishment intervals.
One natural consequence of this is that manufacturers and suppliers need to agree that ‘batching’ – the practice of shipping large orders, less often – is abandoned. Instead, smaller orders that closely match the rate of current consumption are placed and fulfilled at regular and short intervals.
To achieve this, lead times must be dramatically reduced wherever possible. Shorter lead times will have several positive effects. These include a reduction of the Bullwhip Effect already mentioned, and order quantities that more accurately reflect the level of real demand.
The reduction of lead times is not always possible, however. This is especially the case when a large portion of the lead time is made up of transport time.
Considering this, and the risk of supply disruptions, it makes good sense to adopt a more resilient supply portfolio. This should include lower-cost suppliers for evergreen or NOOS items, in addition to items from locally sourced production. Items with long shelf-lives and known demand can still be ordered from suppliers in the Far East, while more trend-driven items can be produced at more accurate quantities locally and replenished at very short intervals. This not only reduces waste, but also reduces the carbon footprint via shorter transport distances.
How much stock do you need?
Recognizing that holding excess stock is a risk to profitability, it’s important to quantify exactly how much stock you need to hold at the store, and at each subsequent node further up the chain. Stock turns can be a reasonable indicator of this. The majority of companies would be quite happy with a stock turn of 5, meaning that they replenish their stock 5 times per year, which equates to approximately once every 10 weeks.
Keeping this in mind, many retailers will habitually keep 10 weeks of cover in stock at any time, which is far more than is needed.
Given recent supply disruptions, it would almost make sense to stockpile inventory. However, when you can’t sell it, it becomes a financial risk. Additionally, the use of local suppliers helps to guard against the possibility of ‘that shipment from China’ being delayed – because your goods are coming from ‘just down the road’ instead.
Provided you can get a reliable delivery once every week, the retailer only needs to keep as much stock as will sell in one week, plus a small buffer to account for variation in demand. In any case, most companies would be able to sustain their business with just 5 weeks of cover, at the most.
Sustainability at every level
Implementing a responsive supply chain is one of the most significant steps that can be taken towards a more resilient and sustainable enterprise. It is inherently more sustainable from a business perspective: cash flows are healthier, and the company is substantially de-risked.
Moreover, it creates and maintains more environmentally sustainable business practices. It reduces carbon footprint, raw material use, and waste from overproduction.
These sustainable practices are what consumers demand.
With a Responsive Supply model, companies can deliver just what the consumer wants – and this is better for everyone.
Retailisation provides solutions and expert advice to companies that want to implement a Responsive Supply Chain.
With the expert guidance of Retailisation’s consultancy services, companies are empowered with tactics that help to dissolve barriers to progress and implement new working-methods that keep all teams aligned on the common goal.
Interested in learning how we can help? Let’s talk about what is possible for your company.