Volatility has been the enemy of logistics and supply chain professionals in the UK and the current environment doesn’t show any signs of getting any easier. The two favourite topics in British conversation have been dominating issues around the supply chain over the past few months: Brexit and the weather! Both are unpredictable and can have a significant impact on supply chain operations, creating a volatile environment for retailers to operate in.
So what impact does this heightened volatility have on supply chains in the UK? And what can the industry do to make sure they are able to deal with any disruption?
With Brexit creating waves of uncertainty, including issues such as whether border controls will hold up deliveries, a number of companies have reacted by stockpiling their inventory in anticipation of future supply disruption. Most notably, Airbus recently announced they were going to stockpile goods in response to Brexit. A number of other companies are reducing their dependence on stock from upstream suppliers, by over-ordering up to 15-20%, in order to maintain business continuity ahead of potential Brexit trade-related supply disruptions.
Brexit is completely new ground for both importers and exporters creating a new scale of supply chain uncertainty. So surely UK companies should be well rehearsed in adapting to the great British weather? It seems not. During the recent cold snap in the UK, a number of supermarkets, fast-food retailers and manufacturers experienced severe disruption in their supply chain. Another scenario saw certain fried chicken fans left empty-handed, as poor weather conditions and lack of contingency planning brought their entire supply chain to a standstill.
Another longer-term factor driving supply chain volatility is the sheer pace of technological change in logistics and the boom in ecommerce. Customers want cheap fulfilment, ease of returns and increasingly, same day delivery, which has put completely different demands on the supply chain. With a warehouse model built on long-term leases, retailers have been left with a rigid supply chain which is unable to react to anything from the changing retail environment, to extreme weather, to an uncertain future.
With Brexit, the weather and the boom in e-commerce comes uncertainty, and this calls for contingency planning. As the old adage goes: “hope for the best and plan for the worst”. What can businesses do to better prepare for volatility?
Lessons in fluidity
Retailers need to learn to not rely on a central point of failure. Many of the recent weather-related food shortages were driven by a lack of access to one central depot which effectively neutralised the rest of the supply chain. In order to reduce the cost pressures on their supply chain if things go wrong and to ensure they can deal with unpredictable forecasts, retailers need to decentralise their warehousing network. For example, three central hubs could become a network of 18 on-demand warehouses across the country. This transforms the long-term fixed costs of the central hubs into short-term variable costs, as well as allowing access to stock should extreme weather conditions occur in a central location. The result is cheaper warehousing, lower transport costs and increased flexibility.
Inventory management should already be a key aspect of a supply chain, but flexibility should be built into the systems for times of uncertainty. Traditionally, surplus inventory was considered a symptom of an inefficient and disjointed supply chain where businesses could not accurately predict supply or demand. In the 1980’s, Toyota Production System highlighted the virtues of just-in-time” and “lean production” which focused on eliminating inventory build up throughout the supply chain. But surplus inventory isn’t a necessarily bad thing. Businesses can reduce the costs of holding that inventory by leveraging cheap, high-quality external storage which in turn gives them the ‘insurance policy’ of having stock in place for times of uncertainty. Of course, this doesn’t always work for certain sectors such as businesses in fast fashion or perishable goods, but for critical items with downstream dependency, excess inventory gives businesses security and optionality in times of uncertainty.
Data-driven approaches the supply chain are key and this is particularly evident in the dominance of online retailers vs brick and mortar. Businesses like ASOS and Amazon have huge amounts of data on customer demand which provides more accuracy in forecasting and managing new inventory. The next logical step in creating a more fluid supply chain is using that data to not only optimise how much inventory you need but also proactively position inventory both when and where it’s needed for the right price.
The date by which the UK must leave the EU, March 29th 2019, is set to be the epicentre of volatility for a whole host of UK companies who have complex trade relationships with Europe and have to make last-minute arrangements to ensure business continuity. In the UK, we’ve almost certainly not seen the last of adverse weather conditions. However, businesses that are proactive about managing those supply chain risks are more likely to sail through the other side unscathed.
Sanjeev Jeyakumar, CCO, Stowga